Bad times are good for Kroll's restructuring service

Security and investigation firm Kroll Inc. is going through an identity crisis-and loving every minute of it.

For most of its 30 years, New York-based Kroll was known as the go-to company for investigating corporate crime and high-profile cases. Its bread and butter was handling everything from chief executives being stalked to governments looking for hidden assets-Kuwait hired Kroll 11 years ago to locate Saddam Hussein's investments abroad.

These days, Kroll is just as likely to get a call from a company that's liquidating its assets or restructuring. One of its executives, Stephen Cooper, is the acting chief executive of Enron Corp.

And, in a year when most companies are downsizing, Kroll is growing like never before. A series of acquisitions-including the purchase of restructuring firm Zolfo Cooper-means that revenues this year should reach $285 million, up 38%. The company is expected to report a profit of $19.8 million, or 61 cents a share, compared with a loss of $21 million last year.

This year, only 18% of Kroll's revenues have come from investigations, compared with nearly 40% last year and nearly 100% just a few years ago.

"We want to be a company that is fine in good times and bad times," said Michael Cherkasky, who has been president and chief executive of Kroll since May 2001.

Part of Kroll's recent success is due to timing. Since the Sept. 11, 2001, terrorist attacks, there is more demand for security services and intelligence. The other part is due to its corporate reinvention.

"We really look at ourselves as a new company," Mr. Cherkasky said.

In 1997, an armored car manufacturer named O'Gara-Hess & Eisenhardt acquired Kroll, a private firm founded by Jules Kroll. The new entity, called Kroll-O'Gara Co., was traded on the Nasdaq. But the marriage was uneasy: The companies, which were managed separately from two different headquarters, were plagued by internal bickering.

After four years, the Kroll side took control and sold the O'Gara portion, pocketing $53 million in cash. It used its windfall to help pay down $76 million in debt. The remaining debt was turned into unsecured convertible notes, which Kroll executives now expect will be converted into equity because the firm's stock price has risen. Its shares are up 29% since the end of last year, trading at about $19.50 today.

Driving the company's growth and its future potential are two acquisitions made this year. In June, Kroll bought OnTrack Data International Inc., the nation's largest data recovery firm, and in September, it acquired Zolfo Cooper.

"Getting a well-recognized name in corporate restructuring is a feather in its cap," said Ben Perks, chief financial officer of Denver-based Navigant Inc., a Zolfo Cooper rival.

In fact, Navigant itself had hoped to acquire Zolfo Cooper. "It was a coveted boutique," said Mr. Perks.

The corporate restructuring business is booming because of the large number of troubled firms. Furthermore, companies like Kroll are likely to be able to grow by acquiring rivals or groups of specialists, since accounting firms will have to jettison their units that perform restructuring work.

"You are starting to see a spinning off of these specialized businesses, like bankruptcy reorganization," said Mr. Perks.

The payoff can be substantial. In just one month, Zolfo Cooper generated $7 million in revenues for Kroll. It also brings Kroll more financial predictability: Its work with Enron, for example, will keep money flowing in for at least another four years, Mr. Cherkasky said.

That's a good thing, because Kroll's revenues from investment banks and law firms involved in IPOs and mergers and acquisitions dried up 18 months ago. While this loss of due diligence work is painful, it's not crippling, insists Mr. Cherkasky, since no single client represents more than 3% of the company's revenues.

Because Kroll no longer relies on any one business line to carry it, analysts' ratings are unanimously positive. Goldman Sachs and Credit Suisse First Boston initiated coverage within the past couple of weeks, assigning "market outperform" ratings. While cash reserves of $67 million gives Kroll financial strength, the bullish ratings are mostly based on its ability to pick up more business from existing customers and to add more clients like Enron, which will be a source of revenue for many years.

Mr. Cherkasky is well aware of what Wall Street expects from Kroll. He said he is focusing on capitalizing on new customer relationships and cross-selling services. Only 50 of Kroll's largest 100 clients buy more than one service from the company, he said. "There is an enormous opportunity," he said.

But even some of Kroll's boosters are worried about its rapid growth. It has acquired 14 companies since 1998, and experts see the need for another layer of management to help digest so many parts.

In the near term, however, another good year seems almost certain. Equity research firm Sidoti & Co. is predicting that Kroll will post a 150% increase in earnings in fiscal 2003, reaching $49 million.

"Kroll has business now that can help in an up cycle or a down cycle," said David Gold, an analyst with Sidoti.

Lisa Fickensher is a reporter for Crain's New York Business, a sister publication of Business Insurance.