Norm Brodsky Tries to Sell His Company…Again …Oct 1, 2009 INC Magazine

Posted on Oct 20, 2009 in Records Management News

http://www.inc.com/magazine/20091001/norm-brodsky-tries-to-sell-his-company-again.html

Norm Brod­sky Tries to Sell His Company…Again

Antic­i­pat­ing the tor­pe­does that can sink a deal By Norm Brod­sky | Oct 1, 2009

My part­ner Sam has bought and sold more com­pa­nies than I can count, and along the way he has come up with what I call the Rule of Three. In nego­ti­at­ing any acqui­si­tion or sale, he says, you will run into three poten­tial deal­break­ers that have to be over­come if you’re going to get the deal done. Any of those obsta­cles can prove insur­mount­able. You may never reach the sec­ond or third if you don’t over­come the first. Then again, you’re not out of the woods if you do.

I real­ized my part­ners and I were cre­at­ing the first big obsta­cle to the sale of our busi­ness by our major­ity share­holder, Allied Cap­i­tal, when we insisted on receiv­ing a larger share of the pro­ceeds than we’d nor­mally be enti­tled to. Most of our invest­ment was in equity, after all, and in any liq­ui­da­tion, debt is paid off before equity. Though the sale pro­ceeds would prob­a­bly be enough to take care of the debt, there would be lit­tle, if any, left over to cover our equity stake. For­tu­nately for us, how­ever, the com­pany could not be sold with­out the landlord’s approval, and we owned the land. So we had the lever­age we needed to insist on bet­ter terms.

I felt strongly that we were jus­ti­fied in using that lever­age. Granted, if CitiS­tor­age were bank­rupt, it would make sense for equity hold­ers to get noth­ing, but the com­pany was far from bank­rupt. On the con­trary, it was very healthy and still had sub­stan­tial value. Oth­er­wise, Allied Cap­i­tal wouldn’t be able to sell it. Under the cir­cum­stances, it didn’t seem fair for the cred­i­tors to get all their money back and the equity hold­ers to get noth­ing. Sam called our con­tacts at Allied and explained our posi­tion. They under­stood and indi­cated we’d work some­thing out once the bids were in.

By then, the sell­ing process was well under way. For me, it was a les­son in how busi­ness auc­tions have changed. Ten years ago, an invest­ment banker rep­re­sent­ing a seller would cre­ate a deal book con­tain­ing the rel­e­vant infor­ma­tion that poten­tial buy­ers could use to deter­mine how much, if any­thing, they would offer for the busi­ness. Now, instead of a deal book, there’s an online data room with the same infor­ma­tion. After sign­ing a nondis­clo­sure agree­ment, inter­ested par­ties receive a pass­word allow­ing them to enter the room and search the data. It’s con­ve­nient for the would-be acquir­ers and even bet­ter for the seller, which can track which par­ties go into the room and how much time they spend there. That’s valu­able infor­ma­tion when you’re try­ing to gauge how seri­ous the dif­fer­ent prospects are.

In our case, it soon became appar­ent that the most seri­ous prospect was a com­pany I’ll call Record­sCo, which I under­stood was con­trolled by Gold­man Sachs. Gold­man had recruited a for­mer exec­u­tive of Iron Moun­tain, the giant of our indus­try, to be RecordsCo’s CEO, pre­sum­ably with the goal of doing more acqui­si­tions and build­ing a rival to his for­mer employer. Frankly, I thought that get­ting acquired by Record­sCo was prob­a­bly the best out­come for us. Though the CEO and I didn’t know each other well, he had a ter­rific rep­u­ta­tion in the indus­try, and as the sell­ing process unfolded, I began to under­stand why. He was smart, affa­ble, expe­ri­enced, and capa­ble, and he came across as a straight shooter. It also didn’t hurt that CitiS­tor­age was twice the size of Record­sCo and had more man­age­ment depth. I fig­ured the merger would open up oppor­tu­ni­ties for our employ­ees that they might not have if we were acquired by some­one else. So I was delighted when the bids came in and RecordsCo’s was by far the strongest.

With a num­ber now on the table, it was time to sit down with Allied Cap­i­tal. Sam and I flew to its head­quar­ters in Wash­ing­ton, D.C., and met with Allied Capital’s CEO and a mem­ber of the board. “Lis­ten,” I said, “I don’t under­stand why you’re sell­ing this busi­ness now. What­ever price you get will be 20 or 30 per­cent less than it should be, which will all but wipe out our equity and yours as well. But we aren’t going to stand in your way.”

Sam and I had already made clear what we wanted: $10 mil­lion of the $13 mil­lion we’d invested; con­tin­ued use of the top two floors of our office build­ing; and an under­stand­ing that we would be able to turn in our stock cer­tifi­cates, col­lect our money, and move on with no fur­ther finan­cial com­mit­ments. The Allied peo­ple were very accom­mo­dat­ing. We didn’t get every­thing we asked for, but we came away with what we thought was a fair deal. At the time, we believed they were just being good part­ners. Only later did we real­ize they were being very smart busi­ness peo­ple as well.

What we didn’t take in was that the trou­bled econ­omy had pre­sented Allied Cap­i­tal with a golden oppor­tu­nity — one that it could use the sale pro­ceeds to take advan­tage of. That oppor­tu­nity grew out of the drop in the price of cor­po­rate bonds. Some of the bonds Allied Cap­i­tal had issued were sell­ing for as lit­tle as 37 cents on the dol­lar. It could buy them back, retire the debt, and make 63 cents on the dol­lar. (When a bor­rower retires debt for less money than it received at the time the loan was made, the dif­fer­ence is recorded as income.) Indeed, Allied Cap­i­tal had done such a debt buy­back in the sec­ond quar­ter of this year, as I dis­cov­ered when I read its quar­terly report. It men­tioned that the com­pany had recently paid $50.3 mil­lion to repur­chase notes with a face value of $134.5 million.

So let’s say that Allied Cap­i­tal cleared $60 mil­lion on the sale of CitiS­tor­age. Then it could turn around and use the $60 mil­lion to buy back more of its cor­po­rate bonds. If it had an oppor­tu­nity like the one I’d read about — which it prob­a­bly won’t, given the recent rise in the price of its bonds — it could retire another $160.4 mil­lion in debt, reg­is­ter­ing a gain of more than $100 mil­lion. No won­der Allied Cap­i­tal had wanted to sell us in the first place and had then been so will­ing to accom­mo­date our request.

Hav­ing over­come obsta­cle No. 1 — us — Allied Cap­i­tal was ready to move for­ward with the sale. A horde of accoun­tants, attor­neys, and ana­lysts from Record­sCo and Gold­man descended on our offices and began inspect­ing our records. To be sure, our peo­ple were used to the drill by now. They’d been through it twice before. But that didn’t make it any less dis­rup­tive to our oper­a­tions and morale, as peo­ple inevitably wor­ried about what the future might hold. For the first time, my part­ners and I began to feel some ani­mos­ity from a cou­ple of senior staff mem­bers. I sup­pose they blamed us for putting them at risk.

As pres­i­dent of CitiS­tor­age, Louis Weiner orches­trated our end of the process, while Sam and I left with our wives for a long-planned trip to Rus­sia. By the time we returned, the due dili­gence phase was wind­ing down. Both Louis and RecordsCo’s CEO were con­fi­dent the deal would go through, as was I. But Sam was wait­ing for obsta­cle No. 2.

It arrived in the form of a let­ter from Record­sCo list­ing 32 items in the lease that it wanted changed. I was flab­ber­gasted. The lease was in the data room, and so there had been plenty of time ear­lier in the process for Record­sCo to raise any con­cerns about it. I knew that at least one of Goldman’s key peo­ple had read it months ago, based on a com­ment he’d made at the time. Why were these points being brought up now? Why wait until the two sides had spent almost a com­bined $1.5 mil­lion on due dili­gence? Was Gold­man sud­denly try­ing to get out of the deal? And if so, why?

So there we were, up against the next poten­tially fatal road­block to sell­ing the busi­ness. We didn’t know whether it was sim­ply a nego­ti­at­ing stance on the part of RecordsCo/Goldman or the death knell of the deal. But we’d find out soon enough.

Norm Brod­sky is a vet­eran entre­pre­neur. His co-author is editor-at-large Bo Burling­ham. Their book, The Knack, was named the best book on entre­pre­neur­ship of 2008 by 800-CEO-READ.

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