M&A Cowboys and Tasty Doughnuts

We have all attended industry events that failed to live up to the hype of the title. I was appropriately skeptical this past Wednesday as I drove over to the Tysons Corner, VA office of law firm Patton Boggs for an executive breakfast event titled “Lessons of the Legends: the Art Before the Deal.”

Wow…was I pleasantly surprised. The panel featured two prominent executives:

Ken Bartee, ManTech MBI
http://www.linkedin.com/pub/0/5/845

Sterling Phillips, Pequot Ventures
http://www.pequotventures.com/team.php?ID=50&catid=18


Both Sterling and Ken steered their respective companies – McDonald Bradley and Analex Corporation -- through impressive growth strategies, combining organic sales growth with targeted acquisitions to enter new markets. The end result for each company: an eventual acquisition at a valuation that provided a stunning return for investors.

John Hagan of BB&T Capital Markets/Windsor Group served as the panel moderator. He is one of the region’s top investment bankers, and his firm is considered the premier provider of M&A advisory and transaction services to government contractors.

Here are a few highlights from the discussion:

-At McDonald Bradley, a targeted M&A program was put in place to help the company more quickly enter new markets. Ken joined when sales were about $3M a year. Five acquisitions later McDonald Bradley’s revenue exceeded $55M with about 50 percent coming from acquired companies.

-From a seller’s perspective, Ken acknowledged the auction process employed by investment bankers is a hassle. Yet, it typically leads to a higher price and gives the seller multiple options to consider.

-Ken also explained that buying a company of less than $10M in revenue is most challenging transaction to pull off. “There is more emotion from the seller around the valuation of the company and they are often inexperienced in the process,” he said.

-Perhaps Ken’s best advice for a company positioning itself for sale is to follow industry standards when it comes to operations, governance and staff compensation. “The more a company looks different…, the less the buyer will understand you.”

-Sterling Phillips’ situation at Analex was quite different, however he also believes in the auction process as a seller. Analex was publicly traded and Sterling explained that as a CEO and director his number one priority was to optimize shareholder value.

-An auction also provides a level of legal protection from shareholders who might question the value of a transaction. Sterling explained that any major corporate or financial initiative required good advisors, as well as a well-documented process. “In a public company, if you try to be a cowboy, you end up as a defendant,” he said.

-Here’s another great quote from Sterling about how his job as a partner in a private equity firm is a lot easier than the requirements of a CEO, “In the boardroom, the doughnuts taste a lot better when you’re not the CEO.”

Build Versus Buy

The ACG National Capital’s Small Business Roundtable events typically draw an intimate group of a dozen or so senior executives for a moderator-led discussion of corporate best practices. During the past three years I have attended roundtables on marketing, sales compensation and employee retention.

Imagine my surprise this morning when I strolled into a packed Fairfax Room at the Tower Club in Tysons Corner, Virginia. One of the ACG represnetatives told me the event was so popular they actually had to cut off registration.

The topic for today’s discussion was certainly timely, “Build or Buy: M&A Best Practices.” The big draw though was the speaker – Brad Antle, President/CEO of IT and network solutions company SI International (Nasdaq: SINT).

Here are a couple of comments from the discussion I found interesting: (note: not all are attributable to Brad)

--Nearly 90 percent of acquisitions fail to achieve their objectives, primarily due to poor planning related to integration.

--When it comes to build versus buy, there’s no better return on investment than organic growth.

--According to Brad, SI’s goal is to maintain the speed and flexibility that defines a small business, while leveraging the financial and operational resources of a publicly traded company.

--Before pursuing an M&A strategy, it is critical to have a clear vision in mind of what you want your company to look like after the process. Establish clear benchmarks. And always focus on profitable growth, rather than merely amassing revenue.