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Behind the ACE Buyout
Here's what happened behind the scenes of a recent management buyout--the case of Louisiana-Pacific and ACI.
Febraury 7, 2000
By Robert Goldfield Business Journal Staff Writer
Dick Wilch grew a little concerned last July when Louisiana-Pacific Corp. instructed him to locate potential buyers for one of its subsidiaries.
After all, Wilch was the top executive at that subsidiary, called Associated Chemists Inc., or ACI. A new owner might well bring in a new management team.
L-P's decision to sell ACI, which makes a variety of compounds for industrial processes, was no big surprise. The forest products company was consolidating, and Wilch himself had advised L-P's CEO, Mark Suwyn, that it was probably about time to sell the specialty chemical company. L-P also assured Wilch of a position internally, if necessary. All that said, however, Wilch's future still looked cloudy.
Then Wilch had dinner with local business lawyer Art Tarlow, a friend who had once served as his legal adviser. "You should do a management buyout," Tarlow told him. "You've got a profitable company, you know the industry and you've got a strong management team."
Tarlow urged Wilch to contact Gayle Veber, a local investment banker whose expertise included structuring management buyouts.
Six months later, L-P sold ACI for $51 million to a San Francisco equity investment company that supported Wilch and his management team. Wilch and two of his lieutenants personally invested in ACI, and the San Francisco firm obtained additional financing from Wells Fargo Bank.
The transaction stands as a clear, local example of a business finance mechanism used regularly throughout the country. Examining the deal shows how experienced executives can pull together funding to pay for their small slice of the American dream-- owning their own company.
Those six months were a whirlwind for Wilch, who already was splitting time between ACI's Portland offices, his Atlanta home, ACI's South Carolina plant and business clients on the East Coast. During that time he continued to search for other buyers for ACI, developed his management buyout proposal, then worked with fervor to line up his partners and draw up documents and contracts.
"When Art suggested it, I thought, `That's novel,' but I didn't think it was necessarily feasible," Wilch recalled. "I met with Gayle more as an accommodation to Art, and that's when the idea started to seem credible."
Wilch learned from Veber that many equity investment funds around the country seek to participate in buyouts, including acquisitions led by every-day managers like him. Some of those funds are huge, like New York's Kohlberg Kravis Roberts (KKR), and invest hundreds of millions of dollars in well-known companies. Others operate on a smaller scale, pursuing less glamorous but still well-positioned industrial concerns.
In either case, their basic investment strategy is the same. The investment fund provides most of the equity needed to buy the company and borrows the rest of the money needed to swing the deal. It eventually liquidates its position, usually within three to 10 years. In the interim it usually draws off an annual rate of return, and it also implements a strategy that will substantially boost the value of the acquisition. That may include helping it grow through its own acquisitions, making capital investments in new plants or bringing in experienced managers to turn around a struggling company.
If the investment fund (itself generated by institutional investors such as pension funds, banks, insurance companies, plus some wealthy individuals) finances a management buyout, the participating managers put up some money of their own. Terms of the deal usually allow those manager-owners to gradually increase their stake in the company by meeting performance goals.
In ACI's case, Veber Partners analyzed the company and reviewed its financial performance. By early fall, convinced that a management buyout was feasible, it then contacted several investment funds that might be interested in the $40 million (1999 sales) company, which employs about 100.
Meanwhile, it was time for Wilch to approach his superiors at L-P. He had faithfully executed his orders to locate prospective buyers and had procured offers for ACI from two parties. In October he told Bill Hebert, L-P's planning and development officer, about the two offers and of his own interest in leading a buyout.
"At that point in time I knew I was in a conflict-of-interest position," Wilch said.
After all, he had been assigned to lure others to pay L-P top dollar for ACI. Now, however, self-interest called for circumventing any other offers and for bargaining the price downward.
Hebert, however, said he trusted Wilch to proceed down both avenues. He instructed Wilch to keep cultivating the other prospective offers and encouraged him to pursue his own buyout proposal. On Oct. 20 Hebert met alone with Veber to better judge whether a management buyout was realistic.
He came away more comfortable with the proposal, and six days later L-P entered into a letter-of-intent with Wilch. The letter gave Wilch 30 days to identify an equity partner and until Dec. 31 to wrap up the acquisition--by all accounts, a short and aggressive timeframe for accomplishing such a transaction.
Veber Partners had previously prepared an offering memorandum to show potential backers. So at that point Wilch hit the road, visiting the partners in charge of 10 investment funds attracted to ACI. He was accompanied on these nationwide trips by Rodger Adams, a partner in Veber Partners, or by Chris Veber, an associate partner with the firm.
About a half-dozen of the investment funds responded with written proposals, said Gayle Veber. Those proposals detailed how much equity they would supply, the rate of return they would demand and the terms by which they would employ and reward Wilch and the other participating managers.
As certain proposals started emerging as the most promising, partners from those investment firms started touring the ACI plants in Portland and Orangeburg, S.C., and reviewing ACI's books.
Wilch had the luxury of choosing from a few solid offers. After seriously considering cutting a deal with Portland-based Endeavour Capital, he opted instead for Industrial Growth Partners, a three-year-old equity firm located in San Francisco.
"When you get down to the last two or three, it's kind of a crap shoot," Wilch said of the choice. IGP put together favorable terms and demonstrated willingness to assemble the deal within the time constraints.
"It's so important in our business to have good personal interactions," said Gottfried Tittiger, IGP's managing director. "If you don't like the guy you're doing business with, you're not going to do the deal."
On Nov. 12, IGP inked an agreement with L-P to supply equity for a management buyout of ACI. Simultaneously, IGP was contacting a handful of lenders with which it routinely worked. Those included Wells Fargo, C.I.T. Group and Chase Manhattan.
"We got an early response out of Wells, and we rushed it over to L-P," Gayle Veber recalled. "They said `Fine, let's move to a close.' "
From that point on it was a matter of fine-tuning. Given that it had other offers for ACI in hand, L-P essentially dictated the terms of the sale, Wilch said.
That included an agreement by which ACI would continue to steadily supply L-P, its biggest customer, with an industrial coating L-P applies to its oriented strand board.
But among IGP, Wells Fargo and the participating ACI managers, there was much to negotiate.
In the end, IGP coughed up $18 million, and Wells Fargo loaned $33 million, the parties said. Wilch himself added a modest $150,000 to gain about 3 percent of ACI. Steve Brown, ACI's operations manager, and Allan Zarling, vice president of finance, also bought small stakes.
The three managers also hammered out employment contracts with IGP, including terms by which they could earn a larger share of ACI.
These sorts of deals often include a mezzanine lender, a second creditor who takes some of the load off of the primary lender, but whose secured interest is junior to any claim of the primary lender.
But with the deadline rapidly approaching, both IGP and Wells Fargo adjusted their terms to avoid having to bring a mezzanine lender aboard, Veber said.
Given ongoing fluctuations in valuation of ACI, L-P and IGP negotiated price up to the last day, Dec. 30, Veber said.
At the end, everybody was happy, he said. L-P got a big check, IGP made a solid investment and Wilch and crew retained their jobs and gained equity in their company.
As for Veber Partners, the deal generated about 15 percent of the firm's 1999 revenue, producing both cash when the deal closed and a small stake in ACI.
"The excitement is there, but it's carefully hidden behind the nervousness," Wilch said.
The real excitement, he added, begins now, as ACI embarks on new strategies for growing the company.
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