Tale of Two Small Enterprises Climaxes in FedEx's Acquisition of Kinko's Chain

By James Flanigan

Dec. 31, 2003 12 AM PT

Napoleon, who called England a “nation of shopkeepers,” would see the U.S. as a nation of small enterprises, owned and run by entrepreneurs, to use the original French word.

FedEx Corp. definitely sees it that way. So it’s buying Kinko’s for $2.4 billion.

Owning the 1,200-outlet Kinko’s chain of copying and office services shops will “expand our relationship with small and medium-sized customers, which is very significant to us,” Frederick Smith, founder and chairman of the giant overnight delivery firm, said in announcing the deal.

Significant is understating it. The Americans who run small businesses or who want to are bread and butter for companies like FedEx. Rival United Parcel Service Inc. figured that out two years ago, when it acquired Mail Boxes Etc., the chain of 4,000 franchised postage and business services stores. UPS is now putting its own name on all of them.

So Smith was under pressure to act. The slow economy of recent years has hobbled FedEx’s highflying delivery business, which depends on a massive fleet of aircraft to jet shipments around the world. FedEx is as a consequence reducing the size of its air armada and building up its ground service, and putting Kinko’s in its armory.

Better late than never. “Kinko’s is a premier chain that owns all its stores,” notes Jack Liebau, head of Liebau Asset Management, an institutional investment firm in Pasadena. “It will allow FedEx to offer distribution and delivery services to small companies.” FedEx already has counters in 134 Kinko’s stores; it will now be in all of them.

The big attraction of Kinko’s is the trend that built it: the ascent of small business in the U.S. economy over the last two decades. More than 550,000 new companies were created in the U.S. in 2002, according to the Small Business Administration, and probably more were born this year. They join the 15 million or so U.S. firms with fewer than 20 employees that provide services, create jobs and generally power the economy.

Kinko’s, which today has 22,000 employees and about $2 billion in revenue, was founded in 1970 by Paul Orfalea, then a USC student, who set up a copying machine in a taco shop near UC Santa Barbara. The company took its name from a nickname of its curly-haired founder.

Orfalea’s idea was a good one. Kinko’s expanded with copying outlets in other college areas. Kinko’s and small-business America hit their stride with the 1980s as the rise of the personal computer allowed individual entrepreneurs to do more tasks and offer more services.

And the downsizing of big companies forced employees to go out on their own, often offering services to their former employers on a contract or outsourced basis. Kinko’s served as a back office for these new businesspeople, adding Internet and other services as they came along.

The chain grew to 127 stores before Orfalea sold some of his stock in 1996 to Clayton, Dubilier & Rice Inc., a New York private equity firm that ultimately picked up 80%. It was the principal seller in Tuesday’s transaction.

Kinko’s was headquartered in Ventura until 2001, when Clayton Dubilier moved the offices to Dallas -- over Orfalea’s objections. Orfalea sold the rest of his stock in several transactions through the late 1990s and had no part in Tuesday’s deal.

In becoming part of FedEx, Kinko’s will move into the hands of another legendary entrepreneur. Smith, who founded FedEx in 1971, had the wild idea of delivering packages and documents overnight by flying them from all over the country to a single sorting point in Memphis, and then back out again. FedEx today has $23 billion in annual revenue and 214,000 full- and part-time employees.

Orfalea says that he has met Smith and admires him. Of the FedEx-Kinko’s linkup, he says : “I think it’s great. I much prefer an entrepreneur like Fred to be leading the company than a buyout firm, frankly. It will be much better for the workers.”

Some question whether such outstanding examples of entrepreneurial verve as Kinko’s and FedEx, born more than 30 years ago, could be created today. Those doubters “have rocks in their heads,” Orfalea says.”Opportunity is everywhere. Look at all the small companies in the Yellow Pages -- the biggest business guide there is.”

Napoleon would recognize it.

James Flanigan can be reached at jim.flanigan @latimes.com. To read previous columns, go to latimes.com/flanigan.