When Michael Cherkasky took over Kroll Worldwide in 2001, it was struggling. A disappointing merger with armored-car outfit O'Gara contributed to the security-and-risk consulting firm's lack of profits at the end of the 1990s. Now, Cherkasky is feeling pretty good. A series of smart acquisitions and some corporate pruning have revived Kroll's fortunes. From the dark days in 2001, when the shares languished around $5, they're up 400% or so, to the low $20s.
Surprisingly, very little of this comeback results from business pegged to heightened security fears after September 11. Rather, failed energy giant Enron and other troubled companies, not Osama bin Laden and Saddam Hussein, have been powering Kroll's top- and bottom-line growth. BusinessWeek Online Technology Editor Alex Salkever spoke to Cherkasky on Apr. 1 about Kroll's turnaround and what's ahead. Here are edited excerpts of that conversation:
Q: You made a number of acquisitions over the past four years and moved into new business sectors. Any more buys in the works?
A: We like our position, and we don't expect to go into any new business sectors through 2006. That said, when we did our last deal in September, we said would not make any more material acquisitions for nine months to a year. In the third or fourth quarter of this year, we'll be back in the market to do acquisitions in the business sectors we already play in.
Kroll is cash-flow positive to the tune of $1 million a week -- and if we have an opportunity to use that cash, we're going to take it.
Q: What's the rationale behind expansion into consulting fields like corporate restructuring, digital-evidence handling, and background checks?
A: It has to do with capitalizing on the opportunities that the old Kroll business created for us. We're the premier business in intelligence and investigation assignments. Lots of people call us in to investigate fraud. But in the past, if we did good work and then walked out of that relationship, we might not get called again by the client for years.
We didn't think that was a good business model. We not only need to respond to crises but also to help our clients prevent the crises from happening again.
Q: Integrating acquisitions is tough. How have you fared?
A: It has been a natural thing. When you walk into a company and they say they have a fraud issue, they take it you're going to do forensic accounting. The ability to do investigations inside of computers -- the electronic-discovery business -- is a natural add-on to the investigative business. All of our businesses are very natural fits. We [have tried] to construct a company that wasn't artificially put together and has natural connections and synergies.
Q: Perhaps, but Corporate America's landscape is littered with failed deals built on the promise of synergies. How are you different?
A: We're organically growing at more than 15%, not including growth due to acquisitions. Take the background-checking business. We have taken it from a $5 million business four years ago to a $25 million business, without any acquisitions. In Ontrack, we're seeing enormous leverage by selling it as part and parcel of what Kroll does.
Q: What areas remain ripe for expansion?
A: The consulting side of the business is strong enough and broad enough that we can grow that organically. We don't need to buy it. We think that in the areas of screening and technology businesses oriented to litigation support, we may need to get bigger faster by doing some kind of addition there. We have come out with an earnings estimate of $1.15 per share for 2003. That includes no acquisitions. We don't need to do anything to make that estimate.
Q: What do you look for in an acquisition?
A: We like businesses we can leverage. Kroll works for 350 of the Fortune 500 companies and 238 of the largest 250 law firms. So we like to be able to instantly sell to all our existing customers. We like businesses that can be global. We want to deliver in London, New York, Hong Kong, and Sao Paulo.
[Acquisitions] must be accretive in the first year. We're not looking for fixer-uppers and venture-capital plays. We're looking for strong management. And we focus on the revenue side, not the cost side.
Q: But aren't you still primarily a domestic company?
A: Our business is 70% domestic and 30% international. We would like to have more balance than that. Our expansion will be more in international than in North America. We specifically want to build business abroad in scalable technology areas, like Ontrack, and the background-screening business.
Q: It seems like the corporate-restructuring business is very different from your other consulting businesses. How does it fit?
A: We don't think it's very different. We help companies try to mitigate risk, and there's no greater risk than going out of business. About four years ago, we got into this business in Europe, when we bought the seventh-largest restructuring-advisory firm in the United Kingdom. We have tripled the size of it and made it [that country's] third-largest business. Then we realized that, for every dollar that was being spent in Europe, much more was being spent in the U.S., so we were missing an opportunity in the U.S. That's when we went ahead with the Zolfo Cooper buy.
Q: You are a distinctly American brand. Are you seeing any backlash from the Iraqi war?
A: Sophisticated people make decisions to hire us. We are international. We are a New York City-based international corporation. We haven't heard any issues on this -- and we don't anticipate them. But if the war could raise barriers to globalization, that could impact us because we work for global companies.
That said, we have always had issues in France. We have a Paris office and staff it with French people. But many people there have always viewed Kroll as being an arm of the CIA. That's simply not true.