INDIANAPOLIS - It wasn't a complete surprise when Adesa Corp. posted a loss for the second half of 1995.
In three years, the Indianapolis-based company had established itself as North America's third-largest auto auction chain. It had bought nine independent auctions and built two others.
But growth brought some lessons from the school of hard knocks. Among them: Keeping up with the competition means more than buying up auctions.
Now, as it expands its services and adds auctions, Adesa has learned to discipline its spending.
And, under the guidance of a one-time owner of small auctions, it is trying to foster the entrepreneurial spirit of the independents.
When the wholesale auto auction industry got its start 60 years ago, all an independent auction owner needed were vehicles and a place to sell them.
Today, competition and an expanding used-car market have forced owners to invest in such extras as cafeterias, computer kiosks and vehicle-reconditioning centers.
In the 1980s, independents who could not afford the changes began selling out to growing chains such as Manheim Auctions Inc. of Atlanta and ADT Automotive Inc. of Nashville, Tenn.
Manheim, the continent's largest auction chain, today has more than 60 auctions in North America and is expanding steadily overseas. ADT, tied with Adesa as the second-largest chain, owns 28 auctions in the United States.
Adesa's founders, a group of auction owners led by Michael Hockett, jumped into the game in 1992. They thought they could raise desperately needed capital by creating an auction chain and taking it public.
They also believed they could keep independent owners involved in Adesa by making them managing partners in the company.
Alexandra Reed Lajoux, co-author of a series of books on mergers and acquisitions, titled 'The Art of M&A,' said Adesa had the right idea.
An independent business owner would know best what investments are needed at his facilities, Lajoux said. 'You need to grant autonomy, but you do need to introduce controls,' she said.
But during those first three years, Adesa had few controls on spending. By mid-1995, it had burned through $57 million from two public offerings of stock.
What Adesa had in size, it lacked in discipline. The company, for example, had budgeted $18 million to build an auction complex in Manville, N.J.; in the end, Adesa spent $37 million.
In 1995, Adesa's managing partners sold the company to Minnesota Power Inc., a utility based in Duluth, Minn. The purchase included Adesa's sister firms: Automotive Finance Corp., a provider of floorplan financing to used-car dealers, and Great Rigs Inc., an auction transport company.
Minnesota Power paid $227 million for the package. But the automotive units lost $218,000 in the second half of 1995, after the acquisition. In 1996, profits from the segment were just $3.7 million on revenue of $183.9 million.
By August 1996, Minnesota Power had had enough. It moved out Hockett and three other senior officers and handed the reins to Jim Hallett, then the president of Adesa's Canadian operations. Hallett had joined Adesa in 1993 when he sold his two auctions in Ontario and Nova Scotia to the company.
Adesa needed to have an 'entrepreneur approach' at each of its auctions, said Edwin Russell, CEO of Minnesota Power. But it also needed direction and a set infrastructure, he added.
Under CEO Hallett, Adesa took a short break from acquisitions to digest what it already had. It also took away some of the autonomy enjoyed by Adesa's managers in the field.
Adesa also began looking for customers who had vehicles to remarket - such as smaller financing companies - but had never even heard of an auto auction.
Another key to Adesa's rally has been increasing the services to dealers and consignors at its auctions, particularly those provided by its sister companies. In addition, Automotive Finance and Great Rigs now serve auctions outside the Adesa chain.
Frank Stephens, vehicle remarketing manager for DaimlerChrysler Corp. in Auburn Hills, Mich., has noticed a difference at Adesa. Stephens said Adesa is more focused and unified in its approach.
'They've gone from a second fiddle to a concert master position,' he said.
Adesa continues to grow and finally is contributing to Minnesota Power's profits. For the first nine months of 1998, Minnesota Power reported net income of $20.6 million from its automotive services segment, compared with $14 million for all of 1997.
But Hallett cannot discount what his predecessors did for Adesa.
In the end, the overspending did give Adesa 'the finest facilities in the industry.'
Said Hallett: 'I can say that because they are all brand new.'