Business Transaction: Blue Dot

BLUE DOT A Subsidiary of Northwestern Corporation
125 South Dakota Avenue
Sioux Falls, South Dakota

Blue Dot was established, as a roll-up consolidator, to purchase and operate companies which provide heating, ventilation, air conditioning, plumbing and related services (HVAC) to residential and commercial customers. Blue Dot was founded in late 1997 by Northwestern Growth Group Corp, the development arm of Northwestern Corporation (a business with extensive utility and other consumer services), with revenues of over 4.2 billion.
Immediately upon formation, Blue Dot began acquiring local HVAC providers in major metropolitan markets. Blue Dot's strategy was to purchase a leading local company with experience, an established reputation and a revenue mix of predominantly residential and light commercial HVAC services. One of their key acquisitions, in the local Minneapolis/St. Paul market, was Standard Heating and Air Conditioning. Their primary objective was the acquisition of companies with superior management teams and strong profit margins. As with most roll-ups, Blue Dot intended to streamline operations, reduce costs, enhance training of employees on a national basis, establish preferred provider groups or group-buying arrangements and, lastly, to bring the corporate resources of Northwestern into play. Realize that the major end game is to go public with the consolidated, enhanced group.

Blue Dot - Aquisitions

	1998	1999	TOTAL
No. of Acquired Companies	28	34	62
Investment	$87.4 million	$68 million	$155.4 million
Pro-Forma Revenue$210 million	$136 million	$346 million
Multiple of Revenue	41.7%	50.0%	44.9%

Summary of Acquisitions
As of the year-end 1999, Blue Dot had acquired 62 HVAC companies investing $155.4 million with a pro-forma revenue base of $346 million. This equals, on average, a price to revenue multiple of 44.9%. Blue Dot used a combination of stock and cash to purchase these companies.

Hindsight Is 20/20
As the income statements below indicate, it would appear that Blue Dot had considerable difficulty implementing its strategy. In 2000, the first year in which the company had most of its acquired units on line for a full year, Blue Dot lost $2.2 million after tax. In 2001, the company, on a pre-tax basis and before restructuring charges, lost $6.5 million. On a positive note, however, the HVAC units of Blue Dot continue to cash flow. As of April 1, 2003 the company has asked for an extension for filing its 10K; nonetheless, Blue Dot is looking at $302 million in write-offs due to the impairment of goodwill.

Based on the first few years of operation and the write-down of the goodwill, it would appear that Blue Dot paid too much for this company, way too much.

In hindsight, we believe that it is much more difficult to transition from "ma and pa operations" to the corporate culture than was anticipated by Blue Dot. Furthermore, most of the original management team members, the glue that kept these small operations profitable, took their money and exited. Long term customer-management relationships ended, leaving corporate people to manage the crucial accounts.

In concept, the consolidation of HVAC service providers was a worthy idea whose time had come. Nonetheless, merging 62 different ways of doing business into one sleek operation is very difficult to accomplish, as Blue Dot discovered.

Blue Dot - HVAC
Historical Financial Statements

	1998	1999	2000	2001	2002*
Revenue	$124,880	$293,736	$408,829	$423,803
Income Before Minority Interests	$3,375	$3,073	($2,265)	($13,562)
Total Assets	$57,035	$279,140	$378,711	$386,249
Capital Expenditures	$2,641	$7,763	$7,366	$8,521
Cash Flow	$4,263	$3,881	$4,161	$1,549

*As of 4/1/2033, 2002 figures were not available

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