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.
Rising Star
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.
