The terms of each CML acquisition are custom-tailored to the business involved, according to balance sheet, operating history, and maturity, but until NordicTrack, most of the previous ones were a variation on a cash payout usually based on book value. This time, however, Leighton proposed that a merger be effected via a swap of stock -- 1.2 million shares of CML's common for all of NordicTrack's. CML couldn't guarantee a floor on the stock value after the deal was signed, he explained, and because tax advantages dictate that the Paulses couldn't sell immediately, they would be at risk for one business quarter, during which period the stock, then around $18, could go down. Recognizing that publicly traded CML stock would likely rise on the merger news, however, the corporation agreed to give the Paulses the stock at its price prior to the announcement of the merger. "I assured them if we have a gain in our stock because of the announcement, they'd get it," Leighton says of the potential profit that in many such swaps would be reserved for the acquirers' pocket.
On the other hand, if they wanted cash instead of stock, CML couldn't offer the equivalent amount, because a cash expenditure would impact CML's P&L adversely. Bookkeeping standards require that the difference between the purchase price less the book value be carried as goodwill; as an intangible asset, it would have to be written off against CML's earnings -- much to the consternation of its stockholders.
The Paulses decided on the stock, and, as expected, in the week of the merger news, CML stock shot up several points to its all-time high, over $22, giving them a gift of several million dollars, on paper at least. Then the price receded in an overall market decline. As to their final take, the jury will be out at least until the end of the period of combined operations that the Internal Revenue Service requires to qualify as a "pooling of interests," which is a tax-free transaction. After that, the Paulses can cash in their chips like any other stockholder.
NordicTrack's employees just missed the eligibility date for participation in CML's corporationwide stock purchase plan, established, Leighton says, so that employees as well as executives share in the greater good. In 1983, just after the company went public, long-termers among CML's then-800 employees were given several hundred dollars' worth of stock as reward for faithful labor. But the gesture almost backfired. The stock certificates read "par value 10?," and, Leighton still shudders, "they thought we were giving them a dime's worth."
Stock deals that bring private companies like NordicTrack into public purview may be a dime a dozen these days, but 100% earnouts are not. The co-owner of SyberVision Systems Inc. last year carved out what is CML's most adventuresome pricing proposition. The seven-year-old videocassette publisher had developed novel approaches to teaching sports on tape, among other things, and needed working capital to exploit them properly. Second-mortgaged to the hilt, its idealistic founder, Steven DeVore, 35, applied to venture capitalists and commercial banks, but deemed the former too greedy, and the latter too restrictive. Then, introduced by a colleague of Leighton's, DeVore relates, "I met Charlie. . . ." The conversation went essentially like this:
Leighton: The first thing we do is buy the company.
DeVore: I don't want any part of that.
Leighton. Look, we understand your market. We are already selling to your type of customer. We relate to the investment, to the time, to the expenses required in building your business.
DeVore: If you're going to buy may company, how will you put a value on it? The goodwill and the R&D and the sweat have to have some worth.
Leighton: Instead of squabbling over what it's worth right now, we'll give you the funding you need to run the company for the next five years, and 100% of the five-year profit will be the sales price of the company. If you went to a bank to borrow a million dollars with your book value of zero, it would be very expensive.We will serve as your bankers. We'll give you a million at our borrowing rate -- slightly above prime -- and no other charges go against you. So you're really getting very inexpensive money to build your own account, which five years from now we'll pay.
And so it was done. Like a TV contestant on a long-running giveaway show, DeVore will get to keep all the profits he can gather in five years. And CML gets to keep the company.
"It's having your cake and eating it, too," DeVore marvels today. "CML said, 'We will bring you our experience, but we will let you manage your vision.' We were able to maintain an individual sense of responsibility and enthusiasm, rather than having some venture capitalist come in, replace the management chain, then sell the company into the slave market." Has it occurred to DeVore that SyberVision may not have prospered by the time the earnout period is up in 1990, in which case he may have nothing to show for his 13-year effort but a super idea for a videotape on how not to sell a business? "The thought doesn't enter my mind. What does enter is, What am I going to do with all that money when I get it?"
