Bill
Marshall read the e-mail twice, then leaned back in his chair and took
a deep breath. The news was exciting. As vice president for business
development at Middlecomm Inc., he was paid to recognize opportunities
like the one a banker friend described in this note. BusinessNet, a
company that fit the acquisition criteria he had recently helped
establish, looked like it was about to become available. The target was
more than half Middlecomm's size, and it could give his company some
much-needed heft in a rapidly consolidating industry. He even had a
jump on due diligence, since it was near the top of a watch list the
young analyst he had hired was developing. There was just one problem.
He wasn't sure Middlecomm was ready to make an acquisition on this
scale.
Bill had joined Middlecomm just 16 months earlier, after much soul
searching. It wasn't just the move to Phoenix; it was also the prospect
of leaving a well-established biz dev team at a Fortune 500 company in
Chicago to become an army of one at a company facing multiple
pressures. But in the end, those very challenges -- along with the
chance to work with Middlecomm's founder and CEO, Dave Kilpatrick --
made him take the leap. An old M.B.A. classmate at a reunion had
convinced Bill to go to the interview. His lunch with the CEO turned
into a three-hour strategy session where they needed extra napkins from
the waiter to capture scribbles covering everything from industry
consolidation scenarios to organization restructuring.
Standing in his office and surveying the parking lot, Bill could see
that Dave's car was still there, nearly alone now in the corner of the
lot Middlecomm's executives used. Things had quieted down a bit now
that Bill's first acquisition, a relatively small one, was largely
integrated. Bill knew he was about to go into Dave's office and share
his news. He just wasn't sure yet how he would frame it, or how hard he
would press the boss to go after the target, assuming it measured up as
he expected.
Dave Kilpatrick had founded Middlecomm 10 years earlier at the
proverbial kitchen table. Taking advantage of falling regulatory
barriers in the communications industry, he started a small
long-distance company serving consumers and small businesses and
expanded it into a full-service local and long-distance carrier. He
reinvested all excess capital into building network infrastructure.
Network ownership helped further improve gross margins and freed up
more cash for marketing and sales.
As the tech bubble inflated in the late 1990s, Dave had refused to
load up on debt the way many of his competitors had. Never comfortable
delegating financial decision-making, he performed the duties of both
the CEO and CFO. He was conservative in his analysis and would deploy
capital only when he was confident that costs could be recovered in a
reasonable period. That was why Middlecomm survived the bursting of the
bubble in 2000. The whole industry contracted as banks and equity funds
retreated from the market and access to low-cost capital evaporated.
Prices began to collapse as one firm after another entered bankruptcy.
Middlecomm, however, was left standing.
But standing wasn't a strategy, especially in the post-bubble world.
The large incumbent carriers were now driving industry consolidation
across both the wireless and landline services. Cable companies and the
large Bell operating companies were bringing low-cost bundled services
to market so businesses and consumers could get all of their
communication services from one company. Scale mattered more than ever,
and it was apparent that Middlecomm's organic growth would need to be
supplemented with acquisitions or extended through partnerships with
other companies.
Dave had made it clear during the interview process that
they had to move quickly to restart the growth engine. The board had
placed him on a short timeline, and if it could not improve
Middlecomm's valuation they might face a sale or harvest of the
privately held company. From Bill's point of view, the pressure was a
plus. He had spoken to four of the nine board members during his
interview process and confirmed the desire for a change in strategy
started at the very top.
How widely the feeling was shared within Middlecomm was another
question, though. Historically, growth at Middlecomm had come through
geographic expansion, and the executive team took legitimate pride in
its ability to execute this strategy. As prices dropped in the
long-distance market, it moved more aggressively into local services
and supplemented the residential services with the small and midsize
enterprise market (SME). The marketing department, led by VP Susan
Miller, would identify underserved markets in geographically adjacent
territories. The network operations VP, Todd Bridges, would deploy
facilities to deliver the targeted services. Then VP of customer
operations Larry Bryant would follow up with the top-notch service Dave
Kilpatrick insisted upon. Though not speedy, the formula was a winning
one, with relatively low risks.
And despite the obvious changes in the industry -- and the strong
signal sent by Bill's arrival -- not all the members of the executive
team were convinced the old formula was obsolete. This hadn't bothered
Bill when he took the job, since managing multiple stakeholders and
bringing a collaborative approach to problem solving is always a part
of business development.
But now, as he thought about the opportunity that BusinessNet might
present, he worried about Todd's reaction in particular. Possessed of a
gruff charm and an obvious command of his specialty, Todd had been with
Middlecomm almost since the beginning, and had about 7% of the
outstanding shares to show for it. He wasn't on the board, but he had
the board's respect, as well as Dave's. Given Todd's reaction to some
wrinkles in that first small deal, Bill worried that Todd wouldn't sign
on wholeheartedly for a possible BusinessNet deal, no matter how good
the business case was.
Thinking about Todd led Bill to glance at his calendar. The
gathering that would give him a chance to spend some more time with
Todd's No. 2 -- a fairly enthusiastic member of the virtual deal team
Bill had assembled -- wasn't for another two weeks. Bill sighed.
Cultural change takes time, even in a middle-sized organization.
To be sure, he had managed to get the new business development
function at Middlecomm off to a good start. He had a small staff in
place within a month -- a couple of financial people who had been
transferred from other departments, plus the young analyst he'd hired.
Development of the virtual teams had been sped along by a review of an
offering memorandum that started more or less as a drill, but turned
into an actual acquisition. The memorandum, for a company called
Plus-comm, was forwarded by an investment banker Bill had worked with
at his prior job. Plus-comm represented a nice tuck-in acquisition that
added customers and also brought a new service that Middlecomm was
modifying so it could be offered across the existing base.
Working with a smaller biz dev budget than he had in his
previous position taught Bill to be creative. He conserved his dollars
for specialists who helped him evaluate specific parts of the deals. He
needed help, for example, from independent third parties to evaluate
the technology platform the target companies had deployed. He also
needed lawyers with regulatory credentials to help negotiate state and
federal filing requirements.
Big-name advisers, though, were out of the question, assuming he
could even get them to return his calls. That was one of the biggest
differences about working at Middlecomm. Bill's phone calls to senior
executives at the advisors he used previously were now returned by more
junior people. He couldn't blame them; he had gotten his start at one
of those firms and realized they had to go where the money was.
On the other hand, the virtual teams were turning out to be a
powerful force for organizational learning and change. Supplementing
internal resources with experienced outsiders created a
knowledge-transfer process that lifted the overall quality of deal flow
and deal management. Bill worked hard to get the other members of the
executive team to understand the value of the virtual team approach.
Though a few worried about sharing their best people -- after all, they
had their monthly numbers to make -- for the most part Bill got the
high-potential employees he sought, team players who could represent a
department and make commitments on its behalf. And the virtual team
members clearly enjoyed the chance to help execute the company's
strategy.
As the Plus-comm deal entered the due-diligence process, Bill began
to see that Middlecomm's greatest advantage in dealmaking was its
agility -- a sharp contrast with his previous company, where the need
for multiple signoffs had cost him several opportunities. Here there
were fewer management layers. Even a small deal had a big impact on the
company, so it was easy to get everyone's attention. The operational
focus of the company allowed them to move quickly from what they needed
to do, to how it needed to be done. Susan and Larry clearly enjoyed the
experience, which pleased the CEO. Even Todd seemed to be intrigued,
since the deal would allow him to gain access to new facilities faster
than if he had to build them.
Bill's virtual team turned in a strong performance on Plus-comm. The
internal members of the team worked well with the specialists Bill
hired. His banking team negotiated creatively to structure favorable
earn-out targets that reduced risk, while allowing the acquired firm's
equity holders to share in the upside. This flexibility allowed them to
outmaneuver a larger competitor. The involvement of virtual team
members also left a good impression on the target company, since they
asked good questions in diligence and in most cases went on to
participate in the next phases of the dealmaking process.
Not that everything went perfectly. A few months after the deal
closed, the team found some problems in the financial due-diligence
process that needed correcting. The Middlecomm financial systems had
been built during the company's high-growth period and were beginning
to reach their limits. Plus-comm's systems were even weaker and the
integration plan had failed to anticipate the cost of software
upgrades. This made it difficult to get the detailed financials
necessary to manage the combined company. A manual process was put in
place, but it was cumbersome and pushed them further away from
Sarbanes-Oxley compliance. Even though Middlecomm was still private,
management was getting pressure from the equity funds (there were two
among the investors, both represented on the board) to achieve SOX
compliance to create more avenues for possible liquidity events.
Todd also complained that the speed of due diligence had
not given him enough time to evaluate the acquired network assets; now
he was finding that much of the switching equipment at the heart of the
infrastructure would need upgrading. That was when Bill first worried
about Todd's commitment to the new strategy. Could it be that his early
enthusiasm for Plus-comm was mainly a political move to show Dave he
was a team player? Recently Todd had been spending a lot of time with
Laura Tyler, the company controller. Laura had not been happy with some
of the fallout from the financial due diligence since it meant more
work for her team. Were they going over budgets, or critiquing the new
strategy?
Bill wasn't concerned about the Plus-comm deal itself. Even with the
additional upgrade costs, the transaction was still showing accretive
earnings by the end of the first year. What's more, the number of phone
calls from key industry analysts and the trade press had increased.
People wanted to know what Middlecomm was up to and what its next move
was giong to be. Even Dave said he could feel an energy level within
the company that had been missing for a long time.
So what was next for Middlecomm? Bill and Dave had wrestled with the
topic in a long private conversation a week earlier, a follow-on to a
group review of progress on the Plus-comm integration. Dave was
inclined to try a series of smaller initiatives similar to the one they
had just accomplished, requiring smaller investments and spreading the
risk across more opportunities. He was wary about tackling anything too
big, too soon. Bill, on the other hand, had enough experience to know
that in most cases it takes as much effort to complete a small
transaction as it does to execute a large one. He thought the greater
risks were in asking Middlecomm's lean management ranks to staff and
execute multiple projects simultaneously.
Their discussion went late into the night and while it did not
result in agreement with any one approach, it reconfirmed the need for
action. What was certain was that Middlecomm's products and services
were concentrated on a small section of the overall communications
market and closely tracked with the business cycle. Dave either had to
grow the company or sell it, and he clearly preferred the former.
The question, of course, was how. Assuming BusinessNet checked out
as a worthy acquisition, it would by far represent Middlecomm's biggest
risk ever. It could also be the deal that restored Middlecomm to its
former glory and assured its survival in an increasingly tough
industry. It could move Middlecomm into the ranks of the super-regional
carriers and allow it to gain access to new sources of capital at rates
and terms only available to larger companies.
Each morning Bill walked by the shelves that held the awards the
company had achieved celebrating its growth and profitability. It had
won those awards through discipline and a dedication to process. To add
new awards and recognitions to those shelves, he had tried to help
build a more outward-looking organization, one that could recognize and
act on new opportunities. Middlecomm had made progress, but had it made
enough? It would have been nice if BusinessNet had become available two
months from now, Bill reflected. But life wasn't like that.
Bill looked at his watch. It was getting late enough for even Dave
to be heading home. Time to hustle over to his office to tell him about
this opportunity. CD
Should Bill Marshall push for the BusinessNet acquisition?
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Juergen Lasowski
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