The Anatomy of a Sale--Ours
There is a moment when it hits you, when you suddenly realize just how high the stakes are now that your company has been put up for sale.
Editor in Chief, Inc.
For Inc.'s editor in chief John Koten, that moment came on Wednesday morning, May 25. He and I were planning to attend a meeting to discuss the impending auction of Inc. and Fast Company, which had been announced the day before by their owner, Gruner + Jahr AG. When I arrived at Koten's Manhattan home, he was on the telephone with an old friend: John Huey, editorial director of Time Inc.'s 200-plus magazines. Koten wasn't saying much, but he had a serious look on his face, and I could tell he wasn't thrilled with what he was hearing. Before hanging up, he thanked Huey for speaking frankly.
"What did he say?" I asked.
"He said Time Inc. has been talking with G+J for months about buying Inc. He said, ‘You don't want us to buy you because if we do, we'll lay off all of your employees.' He told me I should go write a book."
"So what do you think?" I asked.
"I think that's his perspective, not mine."
Several weeks later, Koten reflected back on how important that conversation with Huey had been. "It really galvanized my thinking that I had to take an active role in the auction process," he said. "I realized that unless I worked hard to get people interested in buying Inc. and bidding up the price, Time Inc. might win it.
"If it did, that would be the end of Inc. as we know it, and we'd all be screwed."
Everything Must Go
The first inkling I had that Inc. was on the block had come from Koten in mid-May. I had asked him when he expected to hear back about a request he'd made on my behalf to Gruner + Jahr USA. "Everything is on hold," he said. "Something's up."
By then, in fact, he already had a good idea of what was up. Tipped off by a consultant whose high-priority project had been halted abruptly, he had begun snooping around, calling friends in the industry and networking with editors of other G+J publications. Eventually, he and they had put it all together: Gruner + Jahr AG, the German parent company (which is 75% owned by Bertelsmann AG), was pulling out of the U.S. magazine market. Unbeknownst to the senior executives of the American division, the Germans had been negotiating for several months to sell G+J USA's four women's magazines (Parents, Child, Fitness, and Family Circle) to the Meredith Corp., publisher of Ladies' Home Journal and Better Homes and Gardens, among other titles. But Meredith had no interest in the two business magazines, Inc. and Fast Company, and so G+J had been trying—thus far unsuccessfully—to negotiate their sale to Time Inc. or CurtCo Media Labs, a publisher based in Malibu, Calif.
Editor in Chief,
On May 23, J. Russell Denson, the CEO of G+J USA, met with Koten and Fast Company editor in chief John Byrne, confirming what they already suspected and adding a few tidbits. The Meredith deal was done, he told them, and would be announced the following day, with the closing scheduled for June 30. G+J would have until then to find a buyer for Inc. and Fast Company. If it failed, Meredith would acquire them for an undisclosed sum (the actual figure was $15 million). Meredith would then unload the two magazines as quickly as possible. That evening, Koten passed along what he'd learned in an e-mail to Inc.'s employees.
The staff responded to the news with emotions ranging from acute anxiety to outright panic. Some staffers had previously worked at magazines that had closed, and word of the sale of Inc. immediately triggered painful memories. I had deep feelings of my own because of my long history with Inc. I've been here for almost 23 years now, as senior editor, executive editor, and editor-at-large. When I arrived at the magazine, Microsoft had not yet made the Inc. 500 list of fastest-growing private companies; IBM's new PC was just beginning to catch on; and AT&T was still Ma Bell, the great U.S. telephone monopoly. From our offices on Commercial Wharf in Boston, I not only watched but participated in the entrepreneurial revolution of the 1980s, as both the magazine and the business founded by Bernie Goldhirsh carved out places for themselves in the media landscape. Although I cut back a bit in the 1990s to pursue special projects with entrepreneurs Jack Stack, Anita Roddick, and Norm Brodsky, I was still around in 2001 when Bernie, having fallen victim to brain cancer, sold the business to Gruner + Jahr for $200 million. After G+J named Koten editor in chief of Inc. in 2002 and moved it to Manhattan, I did what I could to help him rebuild the magazine with an almost entirely new staff.
Along the way, I developed a strong emotional attachment to Inc., which made it difficult for me to get too upset about G+J's decision to sell the magazine. After four years of declining ad sales, shrinking budgets, multiple reorganizations, and the decimation of Inc.'s conference business, it had become clear that being owned by the subsidiary of a subsidiary of a German conglomerate was not what this entrepreneurial magazine needed. Its sale, I figured, might well turn out to be a blessing for all concerned. On the other hand, there was also a chance that the sale could prove to be a one-way ticket to magazine oblivion.
In four weeks, we gained years' worth of insight into Inc., into our market, and into opportunities we might pursue. Going through the sale process draws out information you probably can't get any other way.
Regardless of the outcome, I knew we'd learn a lot, mainly because G+J had decided, at Denson's urging, to put Inc. and Fast Company up for auction. The sale of a company is one of the most intense educational experiences you can have in business, perhaps second only to going through bankruptcy. Not until someone else wants to buy your company do you find out what you really own, as well as how much it's worth. Although we on the staff didn't own Inc. (except in a psychic sense), its sale was bound to teach us plenty about the nature and value of the business we'd helped create—and what other people could imagine doing with it. And we were not disappointed. In four fast weeks, we gained years' worth of insight into Inc., into one another, into our market, our competitors, opportunities we might pursue, and potential partners we might work with. Afterward, Koten mused that even with all the trauma, it might not be a bad idea to go through such a process every now and then just because of the valuable information it draws out.
In our case, there were five unusual factors that would inevitably play a major role in determining the outcome:
The first was the fire-sale factor. By insisting that a deal be struck within five weeks, G+J automatically limited the field of potential buyers and tilted the odds in favor of some and against others. That's because a business auction is not like an auction of, say, antiques or art. For one thing, it unfolds in stages. It has to because due diligence takes so much time and effort on all sides. You need a preliminary round to identify the serious bidders, followed by a second round in which the finalists spell out not only how much they will pay but the terms and conditions under which they're willing to pay it. If the bids are close and the terms are similar, there may be more bargaining after that. To be certain of having a deal by June 30, G+J would have to schedule the preliminary round for the beginning of June, less than two weeks after the initial announcement and scarcely a week after the offering materials—collected in the "deal book"—were sent to interested parties. That effectively eliminated anybody who didn't already know the magazine business and have immediate access to a lot of cash.
The second factor was the state of the market. Since the bursting of the Internet bubble, business magazines have been in a deep depression. Overall circulation in the category has dropped, and advertising pages have declined. Many of the magazines most closely associated with the boom have disappeared. Two notable survivors—Fast Company and Business 2.0—are still around mostly because they've been owned by big companies (G+J and Time Inc., respectively) that have been willing to cover perennial losses of millions of dollars.
A third, and related, factor concerned the linkage between Inc. and Fast Company. G+J was insisting that the two be sold together, along with their websites, conference businesses, and ancillary operations. Buyers would not be able to cherry-pick. That condition affected the bidders in different ways. Some, for example, wanted only the websites, which were profitable and growing. Others wanted only Inc. and its related businesses, which also were profitable. Fast Company, meanwhile, was losing money and had struggled to define its niche, but G+J insisted it was a package deal or no deal. This scared off some people and forced others to modify their bids and strategies.
Fourth, there was the black-hole factor, which might also be called the private company factor. The two magazines had not been operated as separate businesses but as units of G+J USA, and neither one had the audited financials that would normally be an important part of the offering materials. That's not unlike the situation would-be buyers often face when they decide whether, and how much, to bid for private companies. Because the bidders don't have access to the quantity and quality of information they would have if they were evaluating a public company, skill and intuition and even luck play a larger role. There's more opportunity for shrewd investors to find hidden value that may not be evident to other bidders. In addition, a buyer's own assets are more important than they might otherwise be. If the buyer has particular business skills that others lack, he or she may be able to project better results, which would justify a higher bid. To be sure, it's also true that the risks are greater when you buy an unaudited company.
President, G+J AG
Magazine Division for
France and U.S.
Last but not least was the Axel Ganz factor. Ganz, who works from Paris, is the architect and former president of G+J's international magazine division, although he'd recently scaled back his activities, becoming president of G+J AG's magazine division for France and the United States. A legendary figure in the industry, he had pushed hard for the acquisition of Inc. and the women's magazines (although not Fast Company), and—as he neared retirement after a successful career—he had to be terribly disappointed over the failure of G+J USA. I had never met Ganz, but Koten knew him reasonably well and believed that his personal view of the magazines' value, his contacts throughout the industry, and his own emotional state as he neared retirement could affect the sale, though exactly how was hard to say. "There's a human side to Axel that's important here," Koten said early on. "He knows a lot of big players in the industry who might think they could use their personal influence with him to gain an edge. It's a wild card."
Indeed, all five factors were wild cards to some degree, and they promised to make the next month or so interesting. And stressful. We could hope only that, when it was over, we'd have a new owner we liked—unless, that is, we wound up owning the magazine ourselves.
Do It Yourself
That thought had occurred to several people in the company, including me. I was worried about what was going to happen to Inc.—that is, the Inc. first imagined by Bernie Goldhirsh in 1979 and then shaped, honed, and nurtured by all of us who had worked there over the next 26 years. I doubted that the magazine I knew and loved could survive another upheaval like the one we'd experienced following the sale to G+J. At the same time, I thought it would be incredibly exciting and rewarding if we had the opportunity to build an entrepreneurial company resembling the best of those we write about—and maybe even do it in partnership with some of the entrepreneurs we most admire. Accordingly, my first calls were to Jack Stack, CEO of SRC Holdings, with whom I've written two books, and Norm Brodsky, CEO of CitiStorage, with whom I write the Street Smarts column in Inc. I also sought advice from Staples co-founder Tom Stemberg, who is now a partner in a venture capital firm.
Koten was thinking along the same lines. He was already trying to contact Intuit founder Scott Cook and Oracle founder Larry Ellison, both former Inc. 500 CEOs. He told me he was passionate about Inc. and wanted to buy it. (That took me by surprise. He hadn't been passionate about it when he'd first arrived in 2002. At the time, I didn't think he even understood Inc. and its market. Most journalists don't, especially if they come from other business publications, as Koten had. He had recently admitted as much, but said that, in the intervening years, he'd come to appreciate the potential of Inc. to transform the way people think about business.) I said that if he was that interested in buying it, we might want to meet first with Brodsky and his partner, Sam Kaplan. He readily agreed.
We arrived at Brodsky's office on the Brooklyn side of the East River at about 11:30 a.m. on May 25, scarcely 24 hours after the official announcement of the sale. It was a gorgeous day, and the view from Brodsky's window of the boats on the river and Manhattan beyond was stunning. For the next two hours or so, the four of us talked about buying Inc. I should say Koten, Brodsky, and Kaplan talked about it. I mostly listened. Pretty soon, certain things became clear.
To begin with, we realized that we would not be able to do a leveraged buyout. Buying a business through an LBO is like buying a house: You come up with a down payment and borrow the rest. As you pay down the debt, using the company's cash flow, the value of your equity increases, often dramatically. That's how a lot of people got rich in the 1980s. But it's all contingent upon your ability to borrow the money in the first place. In this case, Koten estimated that the magazine would go for about $30 million. Inc. simply didn't have enough physical assets or cash flow to support the amount of debt that an LBO would require. At the time, its EBITDA (earnings before interest, taxes, depreciation, and amortization) was negative if you included G+J USA's corporate allocations and $3.4 million if you didn't.
So if management intended to bid, it would have to ally itself with an individual or a private equity firm willing to put up the capital, which was a different ball game. For one thing, the managers' stake in the outcome would be small—perhaps as little as 10% of the company's eventual market value, and much less if they weren't able to build the business fast enough to meet the investor's minimum requirements for return on investment. Even if they did pull it off, they would simply be postponing the sale of the magazine, since the investor would likely want to cash out in a few years. Most investors want to make money, after all, not run magazines.
Brodsky and Kaplan took all this in and recognized that Koten might have better options. They encouraged him to consider all the proposals that came his way. He was in a strong position, they noted, because Inc. was stable and profitable on an operating basis. Accordingly, most potential buyers would want him to stay. Brodsky urged him to keep an open mind. "That was a very important message," Koten said a few weeks later. "I realized that you couldn't predict how things would go, so you shouldn't make a rigid commitment to one particular idea about how things ought to work out. You can't control a process like this, but you can be a part of it."
Running the Numbers
In fact, there were other reasons a management buyout was unlikely, as became evident that evening when four senior managers got together to discuss the possibility. The participants were Koten, Byrne, Denson, and Inc. publisher Lee Jones. As they sat at Harry's Bar in the New York Helmsley Hotel on 42nd Street, Denson expressed skepticism that a buyout could be put together on such short notice. Even if management could do it, he wasn't sure it would be worth the effort. He said he knew the kind of return private equity firms would be looking for—about 30% annually over five years. If a firm bought the magazines for $30 million, it would want to sell them for $110 million in 2010, which meant they would have to be generating about $10 million in EBITDA by then. That would be possible only if the management and staff focused single-mindedly on maximizing profit. No longer, for example, could a management-owned company continue to cover Fast Company's losses. Byrne and the magazine's publisher, Matt Barba, would have to come up with a radical plan—or preside over the magazine's closing. Byrne didn't say much, but the pained expression on his face spoke volumes.
Meanwhile, Jones was running some numbers in his head, and they weren't adding up. If the equity guys wanted a 30% annual return, what would be left for management? Would it even work to do a buyout with so many people—these four plus, presumably, Barba and Ed Sussman, who runs the Web operations? Jones had his doubts. Koten shared them, but he'd come away from the meeting in Brooklyn convinced that they should try anyway. After all, nobody knew what the ultimate sale price would be. There was always a possibility that G+J wouldn't be able to pull off the sale in the agreed-upon time, in which case Meredith would wind up with the magazines, wanting only to get back what it had paid for them. "Look," Koten said, "we've got an opportunity that's landed in our laps. We may have a slim chance of succeeding, but if we don't give it a shot, we're going to kick ourselves a month or two from now when somebody buys this thing for a price we probably could have gotten to."
"That's absolutely right," said Denson.
But attempting a management buyout also raised ethical and legal issues, since all of the participants in the meeting believed they had a contractual responsibility to see that the fiduciary interests of the G+J parent company and its shareholders were met. So the managers came up with some guidelines for themselves. They agreed they could do anything that would have the effect of encouraging more and higher bids. They couldn't discourage anyone, nor could they provide inaccurate information that would make it harder for G+J to achieve the best possible price.
The next day, the discussion continued at the Inc. offices and became heated at times. At one point, Koten was sitting in Jones's office when Sussman came in. Sussman let them know how upset he was about not being included the night before and made it clear that he wanted a piece of the action. Koten said nobody was cutting him out of anything, and he should start thinking about people besides himself and his Web group. Sussman responded that Koten was overlooking the strategic value of the websites. Later, the group from the previous evening reconvened in Koten's office, joined by Sussman and Barba. Denson asked for operating numbers from the various participants and did some quick calculations aloud, again concluding that Fast Company needed a new business model. Byrne sat there silently. Barba was quiet as well and left early. Before the meeting broke up, Byrne indicated that he would not play an active role in any management buyout effort. Denson advised the other participants regarding the numbers, projections, and plans that a potential buyer would want. Then people went their separate ways. That group never got back together, though, following their argument, Koten and Sussman agreed to stay in daily contact to coordinate their efforts.
Joe Mansueto, founder and CEO of Morningstar Inc., the Chicago-based investment research firm well known for its rankings of mutual funds, first learned of the planned sale of Fast Company and Inc. from an e-mail message on the morning of Wednesday, May 25. The message was from Paul Sturm, a writer for SmartMoney magazine and a member of Morningstar's board. Sturm had attended a dinner the night before honoring BusinessWeek's outgoing editor in chief, Stephen Shepard. There, Sturm had run into John Byrne, who'd spent 18 years at BusinessWeek before joining Fast Company, and they had talked about G+J's announcement that morning. In his e-mail, Sturm suggested there might be an opportunity here for Mansueto, who was looking for investments and was interested in magazines. If he wanted to pursue the matter, Sturm said, he should get in touch with Byrne.
At about the same time, Mansueto also received a voice mail message from Mark Edmiston, an investment banker who had brokered a deal the previous year that made Mansueto a 50% owner of TimeOut Chicago, an entertainment listings magazine. Edmiston said that his firm, AdMedia Partners, was representing G+J in the sale of Inc. and Fast Company and wondered if Mansueto was interested. Mansueto called back and asked Edmiston to send him the deal book as soon as it was available.
The book arrived at Mansueto's vacation home in Michigan on the Saturday morning of Memorial Day weekend, and he could see at a glance that it was rather skimpy—a reflection, he assumed, of the haste with which it had been assembled. Of the 28 pages of information, 20 concerned Inc. alone, three covered both publications, and just five were devoted to Fast Company. The entire discussion of Fast Company's potential consisted of five sentences, four of which reflected negatively on the magazine's value. Nevertheless, Mansueto was intrigued. He'd read both magazines since they'd first appeared. Indeed, Morningstar was a five-time Inc. 500 company, and Mansueto himself had been featured on the magazine's cover. "I thought that these were two very powerful brands, icons in their respective areas," he says. "And I'm a big believer in the power of brands and the power of high-quality editorial content."
"When I heard about it, I thought it was perfect for Joe," says Don Phillips, managing director of Morningstar, who has worked with Mansueto for almost 20 years. "Here you had great products in an industry that had fallen from grace. It was a classic value opportunity, and Joe is very good at making decisions. He doesn't waffle."
When John Byrne got ahold of the deal book, his initial reaction was shock, which quickly gave way to rage. He showed it to an investment banker friend who said, "John, I've just read your death warrant."
Byrne, meanwhile, was also looking through the deal book for the first time that morning. Koten had urged him to get a copy as quickly as possible, adding: "You're not going to believe how much it undersells our magazines." Byrne's initial reaction was shock, which quickly gave way to rage. The book did a poor job presenting Inc.'s prospects, he felt, but its discussion of Fast Company was appalling. He later showed the book to an investment banker friend who said, after reading it, "John, I've just read your death warrant." Byrne and Mansueto had scheduled their first telephone call for that afternoon, but Byrne wasn't going to wait. He sat down and in an hour and a half pounded out a 13-page, single-spaced memorandum making the case for Fast Company and fired it off to Mansueto by e-mail.
Byrne and Mansueto finally connected by phone at about 2 p.m. and talked for an hour or so. Byrne explained the history of Fast Company and discussed his vision for the magazine—what he was trying to do with it. Mansueto was impressed. "I have a full-time job at Morningstar," he says. "For me to get involved, I have to be sure that there's a highly motivated, enthusiastic team of talented people who are going to pull this off. And I got the sense from talking to John Byrne that that was the case."
Unlike some of the other bidders, Mansueto wouldn't have to achieve a specific rate of return to satisfy investors, and he had no board to go to or shareholders to worry about. The money he'd be spending would be his own.
Mansueto thought he might have an advantage because G+J was in such a hurry. Unlike some of the other likely bidders, moreover, he wouldn't have to achieve a specific rate of return in a certain time frame in order to satisfy investors, and he had no board to go to or shareholders to worry about. The money he'd be spending would be his own, not Morningstar's. Mansueto had taken Morningstar public in May, and his holdings in the company were worth more than $800 million. So he could move fast. Given G+J's obvious sense of urgency, he thought he might even be able to put in a preemptive bid and stop the auction.
First, of course, he had to settle on a number, which he says wasn't all that hard, despite the sketchiness of the financials in the deal book. "Remember, I was a stock analyst, and I have a background in analyzing financial statements. I can look at Inc. and put a value on it, look at Fast Company and put a value on it, look at the websites and put a value on that. I wind up with a number that gets me to what I should bid, leaving some margin of safety in case I want to increase it."
On Tuesday, May 31, Mansueto e-mailed Edmiston an offer: He was willing to pay $28 million for the magazines and websites if G+J halted the auction. A few days later, Edmiston reported back that the amount wasn't enough to shut down the auction. Preliminary bids were due that Monday, June 6. "I decided to let my offer stand as a preliminary bid," Mansueto says. "After the other bids came in on Monday, I was told I was in the middle but toward the front of the pack. When I heard that, I thought maybe my financial analysis was not too far off."
By the time Mansueto put in his bid, it was clear to everyone involved that there was more interest in Inc., if not Fast Company, than Axel Ganz and the G+J crew had anticipated—which made me think that Inc.'s German owners had never really understood the value, and potential, of what they had. Fast Company was a harder sell, partly because of its association with the 1990s economic bubble. Of course, Inc.'s managers were partially responsible for the interest in their magazine. They were reaching out to everybody they could think of—or at least everybody who might let them keep their jobs. Lee Jones was calling friends at CMP Media, a publisher of trade magazines, and at Wasserstein & Co., which owns The American Lawyer magazine and New York magazine. Koten was trying to contact Pat McGovern, founder of International Data Group. Ed Sussman was in touch with Reuters and talking to a friend at ACON Investments, a Washington, D.C.-based private equity firm. ACON, in turn, was exploring the possibility of partnering with media and real estate mogul Mort Zuckerman—the person who'd sold Fast Company to G+J for $350 million in 2001. Russell Denson was calling someone he knew at Abry Partners, a Boston private equity firm that specializes in media deals. And Byrne, for his part, was trying to stir up interest in Fast Company. He made a pitch to people at McGraw-Hill, owner of his previous employer, BusinessWeek. They weren't interested in the magazine, but BusinessWeek was interested in Byrne. Shortly after the initial announcement of the sale, it had inquired about whether he might want to return. He had said he couldn't do anything until Fast Company's fate was resolved.
Aside from the potential bidders being contacted by the managers, there were some heavy hitters who needed no prodding from anyone. Foremost among them was The Economist Group, which had long coveted Inc. The London-based company, publisher of The Economist, had sent out numerous feelers over the years about the magazine's availability. As soon as the auction was announced, the group's head of U.S. operations, Martin Giles, was on the phone, laying the groundwork for a serious bid. As he told one person close to the magazine, "How often does a really good magazine come on the market—in your niche, with a solid brand?"
Founder, American City
Advance Publications was another contender. In addition to Condé Nast, publisher of The New Yorker, Vanity Fair, and other consumer magazines, Advance owns American City Business Journals, based in Charlotte, N.C., which has a network of 41 business newspapers serving on a local level an audience that is similar to the one Inc. addresses on a national level. ACBJ's founder, Ray Shaw, a former president of Dow Jones, still runs the operation and recognized instantly how well Inc. might fit into it. He lost no time making his interest known.
The ultimate heavy hitter was Time Inc., but its intentions were a huge question mark. As Koten had learned from John Huey, Time had been talking secretly with G+J for months about buying the business magazines, apparently with the intention of shutting them down and putting Inc.'s name on either Business 2.0 or Fortune Small Business. According to one executive at Time Inc., G+J had originally approached it with an offer to sell them for $75 million. That was far more than Time Inc. was willing to pay, but it had continued to discuss a possible deal right up until the auction process began. So would Time Inc. now submit a bid? Nobody seemed to know.
And those were just the players we were aware of. In the end, AdMedia sent out between 25 and 30 copies of the deal book over Memorial Day weekend. The following Tuesday, just one week after the announcement of the sale, the due diligence process got under way. One after another, potential buyers began doing their interviews, and we began to see the many ways people were thinking about taking advantage of the opportunity presented by G+J's decision to sell Inc. As for Fast Company, John Byrne canceled a business trip so that he'd be available to answer any questions the bidders might have about the magazine. Other than Mansueto, none of them called.
North America, The
While Koten, Sussman, and Jones were busy meeting with prospective buyers, the Inc. editorial staff spent the next two weeks trying to focus on putting out a magazine. Koten gave us periodic updates, but that didn't keep us from speculating. Rumors swirled. Although we all had contingency plans in case things didn't go our way, we really didn't want to have to use them. Indeed, no member of the editorial or Inc.com staff left during this period, though several people received job offers. (The business side wasn't so fortunate. It lost three of its marketing people.)
On June 6, 10 first-round bids were submitted to AdMedia Partners, which winnowed out those it knew would not make the final cut. Some bids were simply too low. Others were high enough but the bidders lacked sufficient financial muscle to assure G+J that they could deliver if they won the second round. That left five finalists: The Economist Group, Advance Publications, Abry Partners, another private equity firm called Alta Communications, and Joe Mansueto. Time Inc. chose not to participate in the first round but stayed ready to pounce.
By then, Koten, Jones, and Sussman thought they knew, or could guess, the intentions of all the bidders except Alta, about which they had almost no information. They'd met or been in touch with the people from The Economist Group, Advance's Ray Shaw, and Joe Mansueto, while Russell Denson had been talking to Abry. Based on those contacts, the managers had some sense of whom they should be rooting for—and whom they might want to root against.
The people from The Economist Group, for example, gave every indication that they liked the magazine as it was and wouldn't make major changes, at least not in the editorial and Internet operations. Martin Giles had a due diligence meeting with Jones and Sussman and later told Koten that he hadn't been included because the editorial content of the magazine wasn't a concern. Both Koten and Sussman had numerous other discussions with Giles and his colleagues, who seemed to feel that any problems Inc. had were on the business side, and that The Economist Group could fix them by applying its own publishing expertise, bringing in new resources, and making Inc. a platform for a host of profitable ventures, just as it had done with its other magazines.
Mansueto also professed to be a fan of the magazine, as Koten discovered when they finally connected. On June 6, the day first-round bids were due, Byrne had told Koten about Mansueto and said, "You're going to love this guy. You should call him." Koten was already familiar with Morningstar from his days as the editor of Worth magazine and could imagine why Mansueto would be attracted to Inc. and Fast Company: They were subscription-based information services companies, not unlike Morningstar. As an Inc. 500 CEO, moreover, Mansueto certainly understood Inc.'s market, and it was clear that he ran the kind of values-driven company that Inc. liked to hold up as a model. Granted, there was a possibility that Mansueto would move the magazine to Chicago. That would be hard on the staff, but Koten could live with it: He'd grown up there.
Ray Shaw was a little harder to read. When he and his son, Whitney, arrived at AdMedia's New York office for their due diligence meeting, Shaw greeted Koten warmly. "The last time I saw you, you were a cub reporter at The Wall Street Journal," he said. He and Whitney spoke for an hour or so with Koten, Jones, and Sussman, who all came away convinced that Shaw could turn Inc. into an extraordinarily profitable enterprise. He seemed to do that with everything he touched, and the opportunities for synergy between Inc. and American City Business Journals were too numerous to count. Moreover, these were opportunities, Koten noted, that he would want to explore even if Advance didn't win the auction.
But what a sale to ACBJ would mean for Inc.'s current staff was unclear. Shaw mentioned that he already had more than 500 business journalists who would love to write for Inc. When asked if he would keep the magazine in New York, he said he wasn't sure it was possible to be connected to the American entrepreneurial heartland if you were based in New York. (I happen to agree with him about that. So does Koten, but he argues that there's a bigger danger in being perceived as irrelevant by the New York publishing and advertising worlds.)
Shaw was obviously familiar with the magazine and inquired at one point about Norm Brodsky. After the meeting, Koten called Brodsky and suggested that he give Shaw a call. They eventually had what Brodsky later described as "the worst telephone conversation in my entire life," in which Shaw showed no interest in him or anything he had to say. (Shaw says he remembers it as "a pleasant chat.") All that led us to believe, perhaps mistakenly, that—as much as Shaw might value the Inc. brand—he considered at least some of us expendable. That's true, of course: We are all expendable. But we naturally prefer to work with people who think we aren't.
The distinction between the Inc. brand and Inc. magazine as we know it also became apparent when we finally figured out what the Alta group had in mind. It turned out that Alta was backing a trio of magazine industry veterans, none particularly well known. What interested them was the potential return on investment, not the opportunity to build an enduring brand—or so we thought. One member of the group, Ron Kops, insists that they saw Inc. as a "sleeping giant" and that they had long-term plans for it. If so, it wasn't apparent at the time. They set up a meeting with Koten and then canceled it. A friend of Byrne's met with one of them and reported back that they planned to "gut the magazine." When they met with Ed Sussman, they asked if there was a good young (and presumably inexpensive) editor on staff who could handle a big assignment. From their questions, Sussman deduced that they saw Inc. as an undervalued asset they could quickly streamline and flip for a nice profit.
That, of course, is a legitimate strategy, as well as a reasonable way to take advantage of the business opportunity presented by G+J's decision to unload Inc. at what was arguably the bottom of the market. It was no doubt inevitable that somebody would come up with such a plan. In effect, the Alta group seemed to be betting that the Inc. brand was strong enough to survive for a few years even if Inc. magazine became a pale reflection of the publication that had created the brand in the first place. We hadn't realized that the brand and the magazine could be separated in that manner, so it was an interesting lesson for us—one we hoped we'd never see played out in real life.
In any case, both Alta and Abry Partners were long shots. They were what are known as financial bidders, meaning they had to base their bids strictly on the financial return they expected to get from their investment. Financial bidders almost always operate at a disadvantage to so-called strategic bidders—in this case, The Economist Group and Advance's American City Business Journals—which usually have more resources to draw on and can justify paying a higher price based on how the acquisition will increase the value of their existing businesses.
That said, strategic bidders don't necessarily enjoy competing against financial bidders. With Alta, for example, there was the possibility that, by building massive cost-cutting into its plan, it could project enough future cash flow to justify a much higher bid than the strategic bidders would offer. As for Abry Partners, it had actually been the high bidder in the first round—a fact that led at least one of the other bidders to cry foul.
The controversy arose after the Boston Herald and the MediaWeek website reported that Abry represented Denson, Koten, Jones, and Sussman, suggesting that it was part of a management buyout attempt. Like much of the reporting about the sale, that wasn't exactly true. The New York Times, for example, had run a column by David Carr based on a misreading of a press release. The release had said that, should Meredith wind up buying and reselling the business magazines, the net impact would not be "material to the overall purchase price" of the women's magazines. Carr wrote that that meant Inc. and Fast Company had no value, which came as a surprise to the people getting ready to bid. Of course, the statement actually meant that Inc. and Fast Company had no value to Meredith, which planned to buy and sell them for the same price. Mansueto later said he felt like sending Carr a thank-you note for dampening interest in the sale.
The real story on Abry was that Denson knew one of the firm's partners, Peggy Koenig, and—after the sale was announced—called her up to see if Abry was interested in bidding. She indicated that the firm would be interested if Denson would stay and run the business. He said he'd be open to discussing a role later on if Abry won the auction, but he made no commitments.
Denson did, however, help Abry get the information it needed to prepare its initial bid. When Axel Ganz got wind of that, he called Denson on his cell phone and chewed him out. Didn't he realize how that would look to the other bidders? Didn't he understand his contractual obligations to G+J? To avoid even the appearance of a conflict, Denson told AdMedia not to share bid information with him in the future and made it clear to everyone that he would have no part of any management buyout attempt.
Martin Giles was furious: Here he was about to bring The Economist Group's CEO in from London. Was G+J wasting their time? Did one of the bidders have access to information that other bidders lacked? What was going on?
But the word was already out, and the management buyout stories soon appeared. Martin Giles of The Economist Group, in particular, was furious and raised strong objections with AdMedia. After all, here he was, about to bring the CEO of The Economist Group, Helen Alexander, and other top executives in from London, and a bunch of management insiders were apparently trying to buy the magazines themselves. Was G+J wasting his and his boss's time? Did Abry have access to information that other bidders lacked? What was going on?
AdMedia's Edmiston spoke to Denson, who responded with an e-mail to all the bidders saying that he would be happy to assist any of them, but that, to that point, only Abry had asked to speak with him. That didn't satisfy Giles. He confronted Koten, who assured him that the auction was on the up and up. Koten didn't deny, however, that he would like to do a management buyout if it were possible. "This is an entrepreneurial magazine," he said. "We are all very interested in business. You'd have to wonder what was wrong with us if we weren't trying to buy this thing." Although Giles seemed to accept that explanation, he was still upset.
It all became moot shortly thereafter, however, when Abry dropped out of the auction. That took us down to four bidders. Meanwhile, although it had not bid in the first round, Time Inc. was still circling like the great white shark in Jaws. Koten soon learned from a source at G+J that Time Inc. was preparing a serious bid, which made all of us nervous. In the spirit of leaving no stone unturned, Koten came up with a scheme to have Time Inc. buy Inc. and set it up as an independent business that would be run by Time Inc.'s outgoing editor in chief, Norman Pearlstine, who had been Koten's boss at the Wall Street Journal many years before. The new business would be a sort of retirement gift to Pearlstine, but Time Inc. would own it and therefore have an interest in keeping Inc. alive. Pearlstine aside, that would be an ideal outcome for Koten, who could thus manage to eat his cake and have it too. He walked over to the Time-Life Building to make his proposal directly to Pearlstine, who said he found it intriguing, though he doubted it was a practical possibility so late in the game. Koten asked him to think about it and returned to Inc. If nothing else, he hoped he'd planted the seed that Time Inc. could buy Inc. with the intention of operating it as an ongoing business—and not just taking the title and slapping it on an existing Time Inc. publication.
After that, there were no other stones left to turn. We could now only wait and see what happened when the final bids were submitted.
Put the Spreadsheets Aside
Back in chicago, Mansueto had been conducting his own due diligence, while his lawyers were in New York going through the material AdMedia had assembled. They sent him copies of the documents they thought he would want to see and prepared what he calls a red-flags memo, highlighting potential problems. Meanwhile, he talked by phone with Koten, Byrne, and the two publishers, Jones and Barba, among others. Byrne and Koten sent him e-mails and offered to fly to Chicago, but Mansueto said it wasn't necessary. "I was reaching out to as many people as I could," he says. "The different perspectives confirmed my thesis that these were two strong brands that had been a bit neglected in a larger organization."
To be sure, he had less information to go on than he would normally have demanded. A disciple of Warren Buffett, he believes in doing in-depth research before investing. But in-depth research was not possible in this case, given the timetable. Then again, the speed of the process was part of the opportunity. "I thought the ability to move quickly, to make a decision with less information, gave me an advantage, because the compressed time frame would eliminate a lot of people who'd have to get all kinds of approvals." So he was willing to make an exception and base his decision largely on his perceptions of the quality of the products and the commitment and enthusiasm of the people. As a result, deciding on a final bid was as much a matter of art as of craft. "At some point, you put the spreadsheets aside," he says.
There were, of course, risks that all of the bidders, including Mansueto, had to consider. To begin with, both magazines had circulation problems that would require a major investment to fix. In addition, no one knew when, if ever, the market for business magazines would rebound. And, although G+J obviously had done a poor job of managing the publications, it was by no means clear how much better anybody else could do.
Mansueto had to decide not only what he should bid, given those risks, but how high others might go. He guessed that The Economist Group was his principal competitor. Its team in New York had been talking to lots of people, investing lots of time and money. After weighing all the factors, Mansueto decided to raise his offer to $30 million.
Because of G+J's insistence on reaching a deal by June 30, the way that a bidder marked up the agreement could be as important as the price being offered. There simply wasn't much time to haggle over the terms.
But there's more to a bid than a price. Bidders were also required to mark up a purchase and sale agreement they'd been sent, which covered such issues as when the closing would occur, which liabilities the buyer would take over, and how the employees would be treated, including the severance terms for those who might be laid off. In addition, there was a section specifying what would happen if the buyer later found discrepancies between the seller's presale representations and the facts—which matters could be contested, how much compensation the buyer could claim, how long the buyer had to make such a claim, how it would be adjudicated, and so on. Because of G+J's insistence on reaching a deal by June 30, the way a bidder marked up the agreement could be as important as the price being offered.
Any price a bidder offered carried additional risk because of the black-hole factor—the absence of audited financial statements. The terms the buyer insisted on would, in effect, determine how the risk would be allocated. For example, by increasing the amount of compensation the buyer could get for an alleged misrepresentation, or the length of time that claims could be made, the bidder could shift some of the risk to G+J. Mansueto says he tried to split the risk down the middle. He then sent his bid and the marked-up agreement to AdMedia—and waited.
Joe vs. The Economist
Although the bids had originally been due on Monday, June 13, the deadline was extended two days because the purchase and sale agreement had been sent out later than promised. On Wednesday, Mansueto spoke to Mark Edmiston at AdMedia, who told him that, while it was still early, it looked as though he was going to come out on top. The people who were handling the sale—Axel Ganz and his advisers, including Edmiston—had to do a thorough review of the markups, which were still coming in, and compare them point by point. "There were a lot of things in your contract that they liked," Edmiston said.
Mansueto talked to Edmiston again on Thursday and was told that he, indeed, was the high bidder. The G+J board simply had to approve the sale, and it was meeting on Friday to do just that. To Mansueto, it sounded like a formality.
Edmiston called back on Friday, and Mansueto answered the telephone expecting to be congratulated on winning the auction. Instead, Edmiston gave him some surprising news: Another group—Mansueto knew it had to be The Economist Group—had raised its bid to $32.75 million. (At the same time, The Economist was making a last-minute effort to reach John Byrne, figuring Mansueto must have seen value in Fast Company that it had missed.) Granted, Edmiston told Mansueto, the bids were supposed to be final, but $2.75 million was a lot of money. G+J had to consider it. If Mansueto was willing to match it, he would win the auction. "Let me sleep on that," he responded.
On Saturday, Mansueto called Edmiston back and said that he would match the $32.75 million. "Well, if that's the case, we have a deal," Edmiston said.
All that remained was for the lawyers to iron out the details, which they did on Monday. G+J's lawyers then prepared a formal letter of intent that Mansueto signed and faxed to Axel Ganz in Paris. The next day, Mansueto was attending Morningstar's annual mutual fund conference at the Hyatt Hotel in downtown Chicago when Ganz tracked him down. He thanked Mansueto for the letter of intent but said he had a problem with the repeated assertion in the letter that certain provisions were "not binding." It was a problem, he insisted, because he really did want to complete the sale. Now, moreover, The Economist Group had come back with yet another offer, this one $2 million more than the previously agreed-upon price of $32.75 million. Ganz said that he wouldn't ask Mansueto to match the new offer, but it was necessary to revise the letter of intent and make everything binding that the Monday version said was not binding. Mansueto didn't even have to think about it. "I'd be happy to do that," he said, "because I think we do have a deal."
After hanging up, he called his lawyer, who was not pleased. "That doesn't make any sense at all," he said. "Their lawyers prepared that letter you signed. I cannot recommend that you make it binding. Anyway, a letter of intent is never binding. It has to be subject to the final, definitive agreement."
Mansueto called back Ganz in Paris and explained his lawyer's reservations. "I don't care," Ganz replied. "You have to put 'binding' in that letter. If it says 'binding,' we have a deal. If it doesn't say 'binding,' we don't have a deal."
Mansueto called back Ganz in Paris and explained the lawyer's reservations. "I don't care," Ganz said. "You have to put ‘binding' in that letter. If it says ‘binding,' we have a deal. If it doesn't say ‘binding,' we don't have a deal."
Mansueto went to the hotel's business center and asked to use one of its personal computers. He downloaded a copy of the letter of intent that had been attached to an e-mail. Then he went through the document, changing "not binding" to "binding" wherever the phrase appeared. He printed out the letter, signed it, and faxed it to Ganz, following up with a phone call. "We have a deal," Ganz said. "I will now tell The Economist to go away."
So ended one extraordinary episode in this magazine's history, and so began another. From the announcement to the deal, the whole process took 29 days. In Inc.'s offices on the eighth floor of 375 Lexington Avenue, the sense of relief was palpable, especially after it became clear that Mansueto did not intend to move the magazine to Chicago. Most of us would no doubt have felt equally relieved, and equally happy, had The Economist Group come out on top, but it seemed particularly fitting to have an Inc. 500 CEO as our new owner. Nor did it escape our attention that in the final analysis he'd won the auction only because, as a successful entrepreneur, he was willing and able to do something the other bidders could not do, namely, ignore his lawyers' advice and change the wording of the letter of intent. Had Helen Alexander, Ray Shaw, a Time Inc. executive, or the management of Alta done such a thing, they would have been risking their careers and exposing themselves to the possibility of litigation. They might even have been violating their corporate bylaws.
But was it smart for Mansueto to do it? And, when all is said and done, did he get a good deal? He thinks so. "I think I got a good price," he says. "It reflects some risk. It makes me feel good to know that The Economist bid a little more. That confirms that these are worth somewhat more than I paid."
Less than a month after buying the two magazines, Mansueto confronted one such risk, when John Byrne turned out to be not quite as passionate about Fast Company as Mansueto had thought. On July 17, Byrne—in what he called an agonizing decision—resigned as editor in chief to become executive editor of BusinessWeek. Shortly after that, Mansueto named Koten the CEO and editor in chief of both magazines.
At Inc., the main surprise has been the position we find ourselves in. It's one we've only been able to dream about in the past—even when the magazine was owned by Bernie Goldhirsh. As successful an entrepreneur and as wonderful a human being as he was, he had very conventional views about how businesses should be run. For example, we were never able to apply the open-book practices that had produced such extraordinary results in companies we'd featured in the pages of the magazine. Bernie didn't want to share the numbers with us.
So we had an excuse for not practicing what we preached and for not being the kind of business we liked to write about. We had an even better excuse once G+J took over. Now, all those excuses are gone. Joe Mansueto is every bit the type of entrepreneur and business owner we've held up as a role model to our readers. If we don't make Inc. the type of business we like to spotlight in these pages, we'll have no one to blame but ourselves.
Editor-at-large Bo Burlingham is the author of Small Giants: Companies That Choose to Be Great Instead of Big, to be published by Portfolio in December.
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