Family Feud

Six years ago Kinko's founder Paul Orfalea and his partners handed over the keys to their printing empire to a buyout firm. They're still waiting for a payday.

By RiShawn Biddle

For a company that once prided itself on collegiality, last month's annual meeting of Kinko's at the Inter-Continental Hotel in Dallas was a sobering event. The privately held copying giant provided only soda and water for the 20 or so attendees, several of whom blasted Kinko's largest shareholder, buyout firm Clayton, Dubilier & Rice.

One unhappy shareholder was conspicuously absent: Paul Orfalea, the soft-spoken, self-deprecating founder of Kinko's, whose curly red hair was the source of the company name. Although he still owns 15% of the company and holds the honorary title of "chairperson emeritus," Orfalea has been persona non grata at Kinko's for the past two years. He needs permission from the company to visit any of Kinko's 1,100 stores.

But that hasn't prevented Orfalea from launching a behind-the-scenes feud with Clayton, Dubilier, whose funds own 42.5% of the company and control 7 of its 13 board seats. Orfalea and his 125 former partners, who collectively own 35% of the company, are demanding that Clayton, Dubilier either take Kinko's public or buy them out. Clayton, Dubilier has rejected both requests. "My brother expected Clayton, Dubilier to take us public in two or three years. They haven't delivered," says Orfalea's older brother Richard, a former Kinko's executive.

Retorts Kinko's board member and Clayton, Dubilier President Donald Gogel: "The company can't go public, and that's the position we're in."

Although it's been several years since Orfalea, 54, has had any day-to-day responsibilities at the company, he can't detach himself. "He feels an obligation to the customers, the co-workers and us former partners. We're family to him, and he really hates the way we've been treated," says Eric Johansing, who recently sold his remaining stake back to Clayton, Dubilier and the company.

The squabble has its roots in a series of transactions beginning in 1996, when Clayton, Dubilier rolled up the 130 partnerships that owned Kinko's into one company in exchange for a 27.5% stake and effective control. Looking to take advantage of the late-1990s bull market, Orfalea and his partners took stock in the new company with the expectation that it would go public in a feverish market for new issues.

"Clayton, Dubilier showed us charts and stuff, telling us we were supposed to be the next Starbucks," says former blackjack dealer Gerald Alesia, who co-owned nine stores with Orfalea. "That's the only reason why anyone did the deal."

Six years and a bear market later, the partners are still waiting. While Clayton, Dubilier bought back some stock two years ago, they offered just a 64% premium over the original share price of $11. There's no telling what price the shares would command on the open market today. This much is clear: Wall Street is cool to new issues these days.

Orfalea has hired lawyers and an investment banker. He is also looking to sue Kinko's and Clayton, Dubilier for refusing to issue the same earnings projections to the smaller shareholders that it allegedly provides to AOL Time Warner and J.P. Morgan Chase, who each hold 11.5% stakes.

In the meantime, Orfalea has been hounding management with a weekly fusillade of e-mails and single-spaced letters in which, among things, he blames Clayton, Dubilier for the company's 56% decline in net income since 1996, to $60 million last year on revenue of $2 billion (Clayton, Dubilier's Gogel disputes the numbers, but refuses to cite the official results). Orfalea slyly hints in his missives that Clayton, Dubilier is dragging its feet on the public offering in order to avoid losing the more than $5 million in annual management fees it collects under the present arrangement.

Nonsense, says Gogel. "We would love this company to go public more than anyone. We've got a lot of money into this company and we've been in it for six years. But everyone knew that a significant transformation would be required in order for it to go public. And it's been far more difficult to do. It's like Gallo wine: You don't go public before its time."

As for the other shareholder complaints, Gogel is hardly sympathetic: "We're the ones who've made the significant new-dollar investment, and we've done it twice. Other people left and took money off the table."

In February Kinko's said it may consider buying back the shares held by Orfalea and his partners. But such a resolution may come too late for Cathy S. Reissman, who learned she had lung cancer soon after her sister and fellow shareholder died last year. "My sister didn't get a chance to reap the fruits of her life's efforts. And now it looks like I may have to fight to see mine