Magazines know how to go after a story, but this one came to us. Inc. was recently the focus of a business drama with valuable lessons about what a company is worth--in the marketplace and to the people who work for it.
Part 1 | Part 2 | Part 3
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.
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."
