Saturday, December 3, 2022

Marketing in the Time of Covid – A Restructuring Novella

Times were good before anyone ever heard of Covid-19. Our client, a Harvard-educated CEO, had raised a tidy sum of venture capital from investors in technology companies. Marketing automation technology was all the rage, and the bet was on building a better mousetrap, with a high-multiple business valuation on the short-term horizon.

Covid changed everything. Focused on the entertainment and events industry, the company started racking up losses in the early months of the pandemic. Revenues ground to a fraction of pre-pandemic levels. Despite generous government aid programs, returning to profitability turned out to be elusive.

The CEO’s options shrank as cash reserves dwindled, and the investors’ patience ran low. It became apparent that fixing the company was unlikely and the CEO called a friend who in turn referred him to me and my colleagues at Graphic Arts Advisors.

An initial assessment revealed that while the enterprise was headed for a crash landing if immediate action was not taken, there was nonetheless sufficient gas in the tank to commence a sale of the core book of business. For a strategic sale of assets to take place, we advised that the company reset its focus from mining growth opportunities to retaining key employees and safeguarding customer relationships. Preserving capital became management’s top priority. Facing an unfamiliar journey, the CEO nonetheless quickly grasped arcane legal concepts such as corporate officers’ fiduciary duty to creditors when a company enters the zone of insolvency. Paying ordinary operating expenses now required an understanding of the impact of not only corporate insolvency laws, but also a rigorous and rolling analysis of projected sources of cash and uses of funds.

Five months of intense work later, the CEO took a deep breath and could finally relax, as he safely landed the plane with barely any fuel remaining in the tank. The sale of intangibles from the M&A transaction generated cash to cover most liabilities, customers did not miss a beat, employees always received paychecks with all taxes paid, and creditors were treated fairly and with transparency. The post-M&A closing orderly wind-down process would monetize retained assets and satisfy liabilities, ensuring a graceful transition without reputational harm or messy lawsuits.

A behind the scenes look at the M&A strategic transaction involving the Distressed Marketing Agency (aka “DMA Advertising”) and the buyer (aka “Acquisition Graphics”) offers relevant insight for owners, investors, and senior managers of companies who face critical decisions on the decision to maximize business value against the backdrop of red ink that often results from declining revenues.

Readers of The Hyde Opinion can take away five lessons learned that may be instructive for other distressed companies weighing their options:

1) Stay Focused on Desired Outcome for Sale of Business

DMA Advertising’s Board of Directors and senior management team had recognized the potential benefits of joining forces with a strategic partner, and they acted with sound decision-making grounded in objective analysis. Once the decision was reached to find a buyer, the sale-of-business process received front-burner attention each day. As a company owned by investors and run by professional managers, DMA Advertising did not become distracted by family considerations that may affect the M&A process where family members wear various hats and juggle responsibilities, often clouded by overwrought emotional responses. The professional managers refrained from delay-inducing second-guessing or seller remorse. There were emotional moments, but they did not side-track the intense work schedule that was set in motion when the CEO gave the green light to launch the M&A outreach campaign for procuring a suitable buyer.

2) Steer Away from Bankruptcy Unless Stopping Collection is More Important than Customer Perception of Business Viability

The primary reason why few companies in the printing, packaging, mailing, marketing services and graphic communications industries file for bankruptcy is that the out-in-the-open legal process tends to negatively affect customer relationships. Rather than preserving business value, bankruptcy itself is likely to rapidly diminish the value of the intangible assets. In this case, the seller avoided losing time and focus by quickly ruling out a bankruptcy scenario. To cover all the bases, the CEO obtained a one-hour consultation from a highly respected bankruptcy lawyer. Some of the investors had already obtained advice that the M&A value of DMA Advertising’s customer relationships would be difficult to monetize if the sale process was conducted under the bright lights of a bankruptcy auction. The second opinion from the bankruptcy lawyer was sufficient to confirm the opinion that customer relationships would rapidly deteriorate as word spread that the trusted marketing vendor had landed in bankruptcy court. 

3) Carefully Orchestrate Selection of Buyer Candidates to Maximize Opportunities while Minimizing Inadvertent Public Disclosure

My team at Graphic Arts Advisors worked very closely with DMA Advertising’s senior management team to identify and communicate with potential buyer candidates. The process was collaborative and enabled the CEO to tap into his own strategic contacts while not losing valuable time in exploring one-off opportunities. The CEO resisted the temptation to artificially limit the bandwidth of the outreach communications. No candidates were deemed off limits, however the list of potential strategic partners was intensely scrutinized by the management team before the formal approval to initiate contact, The M&A outreach process was carefully managed and documented. The investors were kept informed.

4) Maximizing Business Value Sometimes is Best Achieved Through Lightning-Quick M&A

Given DMA Advertising’s limited survivability as time and money were drying up, the M&A outreach process was condensed so that it took only 120 days, from start to finish, as compared to 9 to 12 months in most non-distressed company sales. The combination of the CEO’s business intelligence within their niche and my team’s research capabilities yielded nearly thirty preliminary expressions of interest on a highly confidential basis. DMA Advertising received three bona fide offers. The managed sale process achieved its desired outcome of competing offers, each of which required careful assessment. Detailed documentation of the sale process satisfied the board of directors which demanded a rigorous process to ensure liability minimization. The value of the assets was established and confirmed by the market.

5) Timely and Accurate Financial Information was Consistently Provided by the CFO

DMA Advertising’s senior management operated in a highly efficient, coordinated, and effective manner at each step of the sale process. Delay was virtually non-existent. This gave buyers a high comfort level, and, more importantly, DMA Advertising avoided burning precious time and cash. It is worth noting that the CEO was able to provide revenue projections by customer, with reasonable assumptions backed up with emails or other supporting material. The quality of the customer revenue projections enabled the seller to negotiate a more favorable cash component to the transaction than otherwise expected in a distressed company M&A sale. Not only did the quality of DMA Advertising’s information enhance the sale process, but the detailed analysis also facilitated planning for the post-M&A closing orderly wind-down. Detailed spreadsheets showing sources and uses of cash provided clarity and accuracy as to how the assets and liabilities would unwind with or without M&A. In this case, preparation for a post-M&A closing orderly wind-down was instrumental in maximizing the value of seller’s retained assets (receivables and work-in-process), minimizing cash burn, and settling liabilities without litigation. 

All these factors contributed to a graceful transition that involved customers, employees, and suppliers. If certain performance metrics are achieved by Acquisition Graphics after the integration of DMA Advertising, there is potential for increased value in the form of additional cash payments which would benefit seller’s investors.

After the M&A closing, the CEO regained the color in his face, and, in reflecting on what had been accomplished, and with a sigh, exclaimed “they sure do not teach this kind of stuff in business school. I now understand why: no one would believe that this really could happen.”