Most of the calculations that ultimately produce a given deal's financial structure assume a five-year period of operations. The team first projects a profile of what the new company's operating results will look like in the fifth year and then hypothesizes what value is likely to be placed on those results if the company were to use any one of three so-called "paths to liquidity": taking the company public, selling it, or having management buy out WPG's interest. That ending value must give WPG a compound annual rate of return over the five-year period of at least 50%, and it must also make the equity position of each of the top managers worth at least $2 million -- a wholly pleasant experience for managers known in-house as "the equity pop." From these premises, mathematics alone will reveal the deal's basic debt-to-equity ratio, which then must be tinkered with to make room for future growth, particularly through acquisitions.
The final Microwave structure was a model of economy and efficiency, employing as it did a line of reasoning common to many buyouts. The WPG team put up $150,000 in equity representing a 75% ownership, while Morrill, Dahn, and Collins contributed the required cash for a 25% stake. The team then added a $1-million revolving loan from a bank and took back a note for $1.35 million fully subordinated to the bank debt. The type of debt used was, in itself, extremely important, because the bank will view the subordinated debt as permanent capital that both decreases the bank's overall risk and encourages it to expand the "revolver" again after the balance has been paid down should an acquisition present itself.
In other ways, too, the final structure served Microwave's best interests. For example, the team's projections indicated that cash flow would cover interest charges by a factor of 2 and that the company would be able to reduce its total debt to within 50% of the capital structure within 18 months. Moreover, $2.35 million in debt against $200,000 in equity represented leverage of roughly 12 to 1. Because the team also agreed to allow M/A-Com future royalties representing 5% of sales of the acquired product line in excess of $4.5 million, the value of that concession, in effect, pushed the total purchase price to roughly $3.2 million. But here, too, the terms worked to Microwave's advantage, since the company's products would be sold by M/A-Com's sales force, among others.
After six months of frustration and 20 rejections, but only 60 days after their first meeting with the team, Morrill and Dahn became entrepreneurs. For Morrill, the process of building value had just begun. "I found that the sense of responsibility to the people who work here was nearly overwhelming," he says. "Things are much more real. They're just not numbers on a piece of paper anymore." More than anything else, Morrill discovered that the activities he had once taken for granted in a large company now required an extraordinary amount of personal attention. Today when he loses a piece of business or when a receivable starts to get a bit moldy, he's quick to pick up the phone and talk to the customer personally. "You can't keep yourself aloof from your business," he says. "You take nothing for granted. You take it personally. You're scrapping all the time."
When they work right, the magic of leveraged buyouts with heart can work wonders. They can, as in Robert Morrill's case, breathe new life into a dream 20 years waiting or, as happened one day near Soda Springs, Idaho, restore 400 jobs and repair the tattered prospects of an entire town (see box, "High Noon in Soda Springs," page 122). No doubt there are still more wonders to perform, but they're getting harder to find. Indeed, in recent years as the scramble for deals intensified all around them, the team's attention has been drawn ever more inward toward their concept of partnership. Even as they cull for new screamers, the team has redoubled its efforts to build value in the companies already owned, using such methods as refinancings, acquisitions, and sale and lease backs.
And here, too, their results have been impressive. Not long ago, the team engineered an acquisition for TransLogic Corp., which immediately doubled its size -- and the company continued to grow rapidly from there. Late this year, TransLogic is slated to become the first company in the team's portfolio to translate its paper return on investment into hard cash. Stolberg estimates that the company's initial public offering will be valued in excess of $50 million. Of that amount, Weiss, Peck & Greer will realize roughly $25 million on an original equity investment of $1.25 million. At the same time, the manager-owners will themselves become multimillionaires.
But for all the success of a TransLogic, there are many other times when -- despite the team's considerable insight and experience -- the magic just doesn't seem to be there. Once, for example, Stolberg met several times with the president of a subsidiary of a much larger company who was contemplating a leveraged buyout. The deal looked promising, but for some reason Stolberg just couldn't decide whether this manager had the right stuff, and the group subsequently rejected the deal. But this man went elsewhere, got his buyout done anyway, and went on to manage his way to great success. After a polite pause just long enough to let his accomplishments sink in at WPG, the man, still a friend of Stolberg's, jokingly sent him a memorial plaque on which were two tiny metal balls and the following engraved inscription: "The Badge of Uncourage to E. Theodore 'BB Balls' Stolberg. Let it be known that in the face of great adversity, difficult decisions, and monumental unknowns, 'BB Balls' Stolberg crumbled, thereby allowing opportunity and great personal wealth to escape."
Stolberg is still amused to read it. "Well, give us a break," he says. "I mean, we're still learning."
