"It's not always easy to tell," says Stolberg. "You've got to cut through the cosmetics, and that can be difficult when everybody's wearing their Sunday best. The key is to ask the open-ended question and just listen. It doesn't matter which question you ask -- keep it general, keep zeroing in on the human motivations on why he wants to do the deal, are his motivations right, is his background relevant, and then you get into how bad does he want it."
It was against this backdrop that Morrill began to talk about his successful, 18-year management career with M/A-Com, about how the dream that had started with the roofing company suddenly came alive again. But he didn't know anything about venture capital, let alone buyouts, so he checked books out of the local public library. And then, what a letdown when he asked that first bank for help and they gave him a form to fill out as if he were applying for a MasterCard. Unbelievable. But oh, man, it was nothing compared with the long, frustrating hegira through the offices of the venture capitalists. He used to bring a rented videocassette player and a brief tape about the product to every meeting, but eventually he got so sick of seeing it that he had to leave the room. But no, he never allowed himself to get discouraged, not really. Someone sooner or later would surely recognize the merit of his proposal. It was simply the right thing to do, so right that he was willing to leave behind at M/A-Com nearly $300,000 in accrued bonuses and deferred compensation.
"And that," says Stolberg, "was the sound of the right stuff talking. Plus, that man had the smell of Yankee honesty all over him."
It would be difficult to exaggerate the group's emphasis on management. Indeed, were it not for this emphasis its entire approach to the LBO marketplace would be a ridiculous contradiction in terms. Since 1981, Stolberg has seen the market explode (see box, "The Boom in LBOs," page 126) as the success of early pioneers attracted competition from newly formed LBO shops, whose numbers are now counted in the hundreds. In the process, the scramble for the best turnkey deals -- those free of operating or other problems -- became so intense that purchase prices, in many cases, passed beyond economic logic.
"There's simply too much money chasing too few deals," says Stolberg, "particularly the bigger deals. I think deals driven purely by the mechanics of finance have about run their course." Rather than follow the pack, the team adjusted its focus to emphasize building value through operating improvements in smaller deals that were a little too hairy to be bid out of sight. And to do that, they needed the best managers they could get -- managers like Morrill.
Scanning, always scanning, the Screen now moved on to contemplate the specific operating environment of Morrill's product line. And here, too, the buyout conformed to the team's specifications.
Perhaps it would be too much of an exaggeration to say that it does not really matter to the team what business a division or company is in, but it is nonetheless relatively insignificant. Of far greater importance to those who read the Screen are the requirements that the product line in question have some defensible competitive edge, an appreciable share of the available market, and, of course, significant opportunities for future growth that at the moment of acquisition are not, for one reason or another, being adequately exploited. Viewed from this perspective, the product line that would soon be called Microwave Radio was very well qualified. At the time of the buyout, Microwave offered a complete line of portable microwave equipment primarily used for electronic news and sports gathering. Steve DeMenna and Wes Lang, who did much of the original number crunching, estimated with $4.5 million in revenues, the business unit was either first or second in its $10-million industry, with roughly a 40% share and an opportunity to move easily into much larger markets worth some $100 million. M/A-Com, for its own reasons, had decided that the highly specialized nature of the equipment did not fit in with its newly remodeled business objectives.
For a moment, the team worried that Microwave might not fit in with their interests, either. Maybe the market was too small after all? And how could anyone really fathom the operations of a product line that had not had its own independent profit-and-loss statements during its 25-year history? But right here, at a point where many another firm had done the opposite and walked away from the deal, Stolberg and associates put Morrill before the numbers and thereby put a little heart in the buyout. They were convinced he had the right stuff, and they were not to be disappointed. It soon became clear that Morrill had conceived a plan that would allow the company many years of profitable and rapid growth before the presumed market ceiling became a threat, if ever. All he had to do was remove some of the hair.
Almost every WPG deal features some kind of depilatory ritual in which problems become opportunities, just as frogs become handsome princes. It is the very stuff of dream making. In fact, the team insists that management be able to list four or five specific improvements they can make in the business after the buyout is done, or else they're not interested. "If they can't do it," says Stolberg, "they're probably not good managers anyway." But in this case, Morrill and his partners, living up to the team's expectations, had already spotted the right improvements: get out from under the burdensome corporate overhead, move into less expensive quarters, develop international sales, apply for government business, streamline marketing by trimming the product line from 20 items to 10, and institute a new customer service program that could reduce repair turnaround time from 30 days to 2 days. Once some of these adjustments were factored into the first-year pro forma projections, like magic, Microwave, which had lost money in the previous two years, turned an operating profit of $600,000. And with that, M/A-Com's asking price of roughly $3 million began to look very attractive indeed.
"In the old days," Stolberg says, "back when doing deals was a slam dunk, I could buy a good company for 4 times earnings. But now, there are a lot of people around who don't mind paying 8 times, or 10, or even higher. It's gotten ridiculous." The Microwave deal's multiple of 5 times EBIT (earnings before interest and taxes) was like buying a gallon of gasoline for 50?. Moreover, the team's computer model predicted that the company could easily be worth $15 million in only a few years. All that was necessary now was to build the financial bridge to get there.
