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The Anatomy of a Deal

The following might be a subtitle for this true account of how one deal was put together: “In spite of everything, you need only one buyer – the right one!” (Although the transaction is factual, names, financial data and other details are fictional.)

The company (let’s call it IndustrialTech) has carved a niche in a billion dollar industry. It manufactures proprietary electronic products and is owned by a private equity firm that wants to sell it for liquidity reasons. At the beginning of 2010, the private equity group retained Forbes Mergers & Acquisitions to take the company to market. The goal was to have it sold by the end of the year.

IndustrialTech had annual sales of about $12 million, gross margins of 50 percent, an EBITDA of $1.8 million (15 percent) and a reconstructed EBITDA of $2 million. It also had been growing over the past ten years at a 10 percent rate and had always been profitable. It had a diverse customer base split about equally between end-users and OEM accounts. However, the seller wanted to set a very aggressive full price, with all-cash in a not-so-vibrant M&A market.

On the plus side, however, the seller was cooperative and provided any information that Forbes needed. It also had audited statements, conservative accounting and instant monthly statements. IndustrialTech was, in addition to these factors, on the verge of getting a substantial amount of new business.

In preparing to take the business to market, Forbes came up with a basic game plan. For confidentiality reasons, certain direct competitors were eliminated from the buyer search. Synergistic buyers were targeted-either because they served similar markets or utilized similar manufacturing methods. Forbes also elected to contact selected private equity groups and other intermediary firms.

More specifically, Forbes planned on creating a list of 100 potential buyers. A buyer was defined as an entity that had signed a Confidentiality Agreement, had been pre-approved by the seller, and therefore, had been sent an Offering Memorandum. Forbes anticipated 15 written Term Sheets leading to five Letters of Intent which, hopefully, would lead to the best deal. Forbes advised IndustrialTech that the market was currently below the multiples asked by the seller. However, they succeeded in getting the seller’s premium valuation, and that success was to be based on the following:

  • Preparing a thorough and compelling Offering Memorandum and detailing out the positive future prospects. This required the complete cooperation of IndustrialTech’s management team.
  • Developing a complete list of possible buyers both in the U.S. and abroad.
  • Contacting the buyers to see if they would be interested in the company, but still maintaining confidentiality.
  • Administering all of the potential buyer activity and sending the Offering Memorandum to the appropriate parties.
  • Following up with all of the prospects who received the Offering memorandum and arranging tours of the facilities with the serious prospects.
  • Setting time frames for expressions of interest and term sheets, and fielding questions from the serious prospects.
  • Holding the deal together in spite of fall out from the global recession, which resulted in a two-month delay that could have been much longer.
  • Making sure that complete confidentiality was maintained and making sure that any future confidentiality leaks did not occur.
  • Constantly reminding IndustrialTech’s management to stay focused on maintaining sales and profit goals.
  • Maintaining communications with both the buyers and IndustrialTech’s lawyers and other outside advisors.

Forbes was able to develop a list of 85 possible acquirers; however, five would not sign the Confidentiality Agreement. Here is a breakdown of the 85 possible buyers:

  • Strategic – 45
  • Some Synergy – 20
  • Private Equity Groups – 20

Of the 85 possible buyers, 15 were companies or divisions of firms with annual revenues of $1 billion or more. 12 of these 15 were foreign or owned by foreign companies. IndustrialTech chose not to deal with four of the buyer firms due to negative industry knowledge. Two of the buyers were individuals that had financial backers. Four buyers were just “bottom fishing.” Three of the 85 decided not to move forward due to the credit crisis. One buyer only wanted to acquire assets, not the stock, of IndustrialTech. Interestingly, eight of the 85 firms had previously talked to IndustrialTech about a possible merger or acquisition.

Of the buyers who elected not to proceed or move forward, the majority felt that acquiring IndustrialTech was just not a good fit. Some of the other reasons why other buyers decided not to continue were:

  • Management was too thin
  • Since IndustrialTech was a good company, the price would most likely be too high
  • Buyer purchased another firm
  • One potential acquirer was acquired itself
  • Buying company was having its own internal problems
  • Buyer wanted to move company – this was unacceptable to the seller

After all of this, Forbes arranged five visits for acceptable buyers – the target number. Overall, Forbes received:

  • Term Sheets 4
  • Verbal Offers 2
  • Letters of Intent 4

Of the five buyers who visited the business and met with IndustrialTech’s management, two wanted to acquire the company. These were the best prospects. There were also two other firms, held in abeyance, in case one of the other two didn’t work out.

One of the original two and IndustrialTech’s preferred acquirers competed for the business and ultimately offered the desired price and terms. The buyer was:

  • A public company that wanted to grow through acquisition.
  • One with a synergistic product line.
  • Unlike some of the private equity groups, not totally focused on the financial aspects.
  • One with an appreciation of IndustrialTech’s product lines, its technology and the company’s potential.

Forbes started with 85 possible buyers. The final list came down to just a few and global recession certainly did not help in the sales efforts. IndustrialTech was not a company for just anyone. Despite all of this, Forbes got the deal done – proving once again, that you need only one buyer – the right one!