The Anatomy of a Sale--Ours, Part 3
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.