Larry Lane
VR President
- Top price at all costs
The objective is clear, just like the submarine commander who said, “Damn the torpedoes, full steam ahead.” Whether it is a public company divesting a subsidiary or a private owner, regardless if the plant is moved and the employees are dismissed, the top price is paramount. Of course, the directors of a public company will be challenged by the stockholders unless they accept the best price and/or best terms. On the other hand, the private owner has full discretion over such a decision, assuming he or she has the proper voting rights. The open auction process is the best way to ratchet the price upward.
- High price but other considerations
The seller wants a very full price which means normally the company should be sold to a strategic buyer. However, one strategic buyer which offers $30 million and plans to move the business and replace management is less desirable than a $27 million offer in which everything is left in place.
- Good price but some risk
The seller may be in an adverse situation in which there is extreme customer concentration, weak or retiring management and/or other mitigating circumstances. In this case, strategic buyers will often “back off,” but a large competitor will be less concerned with these matters when rolled into the total package. However, trying to sell to a competitor is fraught with risk. Risk that the buyer will renege on its initial offer, will walk away with a lot of competitive information, or will be turned down by an adverse ruling of the Scott Hart-Rodino bill (anti-trust).
- Responsible buyer but lower price
A financial buyer traditionally does not pay the top price, but usually improves the company’s profitability by making some changes including the replacement of some management. While the status quo is more or less the same, the financial buyer’s modus operandi is usually to resell the company (often times to a strategic buyer) in five to seven years; albeit the operating management may have obtained 20-25% ownership during the interim.
- Management buy-out (MBO)
A management buy-out is probably the most considerate transfer of ownership with the least monetary reward to the owner. Viewed differently, if the company has significant customer concentration or acute technology dependence on management, then the best alternative might be an MBO. Because existing management usually is under-financed, it is common for the seller to take back paper as a majority of the purchase price.
- Seller maintains control after the sale
Recapitalizations are a way for the owner(s) to payout a significant part of the company’s worth by leveraging the balance sheet. Of course, such financial engineering places considerable pressure on existing management. The private IPO as originated by Heritage Partners of Boston is a unique refinement of the regular recapitalization. It works as follows: the owner is paid for 100% of the company but then is required to reinvest on a tax-deferred basis. Heritage invests a layer of preferred stock. The remaining cash is obtained through a modest layer of senior debt. Down the road, assuming that “Newco” prospers in the future, the seller gets a major “second bite of the apple,” cashing out again at a substantial gain.
- Sellers must stick around after the sale
In an article by Michael Selz, a staff reporter for the Wall Street Journal, he states: “The only way the owners are going to get a premium for their companies is to hang in there for a while and make sure everything goes well. Many prospective sellers want to cash out and walk. Some buyers will not acquire a company unless the owner has a substantial stake in the company’s performance for at least two years.”
