CASE HISTORY

A Business is Sold: The Story Behind the Story

Reprinted from 'The Vancouver Business Journal', June 8, 1998
By Kelli Fulton, Contributing Writer

On April 15, Pacific Aerospace and Electronics, headquartered in Wenatchee, Washington, announced the acquisition of Electronics Specialty Corporation of Vancouver, WA in a transaction valued at $8 million. Behind the scenes, Acquisition Services Group, Inc. (ASG) a regional merger and acquisition firm with offices in Bellevue, Spokane, and Portland was the firm that brought the buyer and seller together.

Electronic Specialties
Electronics Specialty Corporation (ESC) dates back to the 1920's, when it manufactured automatic coal stoker equipment. During World War I, the company shifted gears to meet the urgent needs of the country's defense requirements. In doing so, they gained an international reputation as a manufacturer of relays and gyroscopes, then later moved into electronics and developed an expertise in machining, plating, coil winding, and welding to meet very stringent Space and Defense Department specifications. ESC has made parts for almost every satellite and space vehicle launched by the U.S. and Europe over the last 20 years.

In 1996, Frank Preve, President of ESC, found the ideal acquisition in a privately owned company, Displays & Technologies (D&T) in Santa Cruz, CA. Though small, D&T had developed leading-edge technology in optic filters and the improved durability of Flat Panel Displays (FPD's). FPD's are rapidly replacing Cathode Ray Tubes for displaying a wide range of data and information for military and commercial use.

With the acquisition of D&T, ESC began to see some immediate opportunities to ramp up revenues many times greater than their historic $5 to $6 million levels. Preve believed that the longer term revenue projections were even more exciting, all using proprietary technology and creating high margin products for military, commercial, and eventually, consumer markets. All this sounded like good news until it became apparent that it was going to take at least a $5 million increase in working capital to fund the growth. Says Preve, "I felt like the fellow with a $10 million cashier's check in my pocket but absolutely no cash."

Looking for an answer
In October of 1997, Preve brought in Acquisition Services Group, Inc. (ASG), a merger and acquisition firm that focuses on serving privately owned Pacific Northwest manufacturing, service, and distribution firms with market valuations between $1 and $20 million. Preve explained his problem to ASG President, Barry Evans, in asking "How do we get the funding we need, together with additional support services, without having to give away the store?" After analyzing the situation, ASG concluded that ESC should find either an investment group to buy an equity stake in the firm, leaving the management team in place, and eventually plan a public offering as an exit strategy, or find a public firm that would acquire ESC, leaving management in place, provide the necessary capital investment, provide additional support capacities, and provide a vehicle by which the present ESC stockholders could participate in the expected growth of the combined companies.

ASG's first step was to create a detailed profile of the ideal candidates in each of the two categories, followed by an exhaustive search of their regional, national, and worldwide buyer databases. The specific profiles were investment groups that either manage or have access to capital in excess of $100 million and have present holdings in technology, defense, space or electronic industries and a willingness to look at opportunities in the size range of ESC.

There were also public companies actively trading on the NASDAQ that were profitable, demonstrating growth, with competent and experienced management in place, of a manufacturing "mentality," with strong financials and access to capital, with revenues less than $100 million (the smaller the acquirer, Evans explains, the greater the impact ESC could have on operations and therefore, greater influence on their destiny), and management teams whose financial destiny is tied to the long term appreciation of their common stock.

All very hush hush 
The next step in the process was delicate indeed; the task of confidentially contacting potentially interested parties without letting the "cat out of the bag." (ASG is highly skilled in confidentiality, and their databases are very carefully guarded.) Having customers, employees, or competitors learn that a firm is thinking of selling can have disastrous consequences. In this process, confidentiality agreements get signed, and buyers must agree to ASG procedures. Buyer screening and qualification are critical ingredients, and off-site meetings are all part of the standard procedures.

Throughout these processes, ASG never puts a price on a business.

Value is in the eye of the beholder
Evans explained that setting a price really just sets a ceiling, and that true value is what a qualified buyer is willing to pay. Thus, they invite qualified buyers to tender their own valuations. He further notes that different buyers have different reasons for buying, different capacities to pay, and different costs of capital. Buyers routinely come to their own perceptions of value and Evans quoted an adage that states: "A buyer seldom buys what the seller thinks he is selling" to underscore how different buyers view the valuation process.

Finding the right fit -- Cinderella's slipper
Evans and one of his partners Jim Landstrom teamed up to contact over 300 targeted buyers generated from their database and soon had lots of activity, including requests of additional data, explanations of financial data, and site visits. The first round screening narrowed down the buyer list to 30, and eventually to a total of eight that were believed to represent the best possible candidates. ASG then extended invitations to the eight to submit letters of intent within a designated one-week period with a firm cutoff date. Two investment groups and three NASDAQ companies put forth their indications. Two were rejected as not being within the desired valuation range, and the other three were invited to resubmit with variations suggested by ASG. Two complied. With these in hand, ESC made a counter offer to the firm they believed to be the best possible fit.

The signing of the prenuptial
Pacific Aerospace & Electronics, a rapidly growing NASDAQ company that serves the aerospace and medical equipment industries, emerged as the most suited to ESC’s needs.

The agreed-upon transaction was subject to the buyer performing their due diligence investigation and verifying the data upon which they had relied in arriving at their offer. While this was taking place, Pacific Aerospace negotiated employment and incentive agreements with the key owners of ESC, and the lawyers began working toward the closing process.

A match made in Heaven
Pacific Aerospace obviously believes they have added to their existing high rate of growth, and, in all likelihood, added an aspect to their company that will favorably impact how the investment community views and values their company. I’ve seen sellers believe they sold their firm for a fair price and have created a plan to realize significant benefits in the future. They have an equity participation in Pacific Aerospace, together with other incentives, that can provide dramatic capital gains if they produce the growth and profitability they believe is attainable. Separate from the purchase transaction, Pacific is providing them with $6 million in working capital, additional manufacturing synergy, the right to "run their own show," and a well defined future exit strategy through their ownership of shares in a publicly traded company.

TOMBSTONES

A Random Sample of ASG’s 200+ Transactions of Businesses sold Within the Last Eight to Ten Years