How experience and execution enabled a fast-growing company to make a significant acquisition Fast track to growth
The ability to adapt to change is a key element of a company's ability to compete. This is particularly true of fast-growth companies; as the size and structure of an organization rapidly changes, management will often be faced with unfamiliar challenges and opportunities. In many situations, the benefit of experience can mean the difference between success and failure.
This was the case when an independent apparel retailer was acquired by a private equity firm that went on to quickly acquire three more similar companies. Within 18 months, the small, independent retailer had expanded to four major brands and locations across the country. Annualized revenue increased six-fold.
New deal creates opportunity and issues.
Then, management decided to acquire a fourth company. The planned acquisition would nearly double the company's revenues and would involve taking a publicly-held company private. But to complete the deal, and to meet the deadline for the significant financing around it, the company needed to file audited financials that integrated the three recently acquired entities.
The audit deadline was imminent and inflexible. The financial statements needed to be prepared in a very short time frame, but the company's rapid growth through acquisition had created several new complex business, accounting, and tax issues, and the ongoing integration of the most recent acquisitions was already straining internal resources. It soon became clear to the PwC audit team that company management was greatly underestimating the time and resources needed to complete the audit and issue a set of complex financial statements.
Management team turns to PwC to help with complex financial reporting and audit needs
"Within an 18 month period, the management team went from running a single entity generating about $80 million in revenue to managing a combined entity of approximately $1 billion," recalled Private Company Services partner Daniel Hutchins. "They didn't have the experience to know what it takes to get an audit done and issue a set of complex financial statements when you grow that much, that quickly. So we had a conversation with management and said, 'This will never get done in this time frame unless you change your approach.'"
The PwC team explained what it would take to integrate three significant acquisitions from a financial reporting perspective, prepare a consolidation, and address the complex applicable accounting standards — all within the accelerated schedule mandated by the financing requirements.
"We helped them to understand what the project would require and to appreciate the limitations of the resources they were planning to rely on," said Hutchins. "We worked with them collaboratively, not just around what we were doing, but around how they needed to supplement their existing resources to get the project done." At the same time, the PwC team deployed audit teams to work onsite at the company's three new locations across the country.
Because PwC was able to foresee complications and execute efficiently, the audit was completed on time and the company was able to complete the financing, the acquisition, and to pay a significant dividend to stakeholders.
When changing times and technology outpace your product
How advisory helped a bankrupt manufacturer maintain liquidity and restructure approximately $350 million in liabilities
In a decades-old glassmaking plant in the United States, a team of executives watched glass components moving along a precise assembly line, knowing they had to shut it down.
The story was familiar enough: Changing times and technologies had outdated the company's end product — cathode ray tube (CRT) devices. With that, the specialized line of glass panels and funnels the company manufactured had lost its reason for being.
"The question was how long the US manufacturers were going to continue to make CRT televisions," recalled PwC corporate finance and advisory director, Keith Kaiser. "The estimate was that within four years, those companies would all go away."
The privately-held manufacturer, acquired in the 1980s by an Asian conglomerate, had been in the glass business for the better part of a century and operated several plants in the US. But as consumer and business preferences turned rapidly away from CRT screens and toward flat-screen liquid crystal and plasma displays, the company found itself deeply in debt and mired in a dying business.
Tough management issues; no easy solutions
"The subsidiary had become a financial drain on the parent," said Kaiser. "Management knew they had a problem. What they weren't sure of was exactly how to solve it."
Having already decided to shut down all three of the company's US manufacturing facilities, executives from the parent company, who had been brought in to wind down the subsidiary, still faced a number of issues. They were concerned about disrupting the flow of product to the remaining customer base, and there were significant debts and pension liabilities to be reconciled. So they reached out to PwC for help.
PwC studies options and helps the company move in a new direction
"We started out by asking the management team what they wanted, ideally, to accomplish," said Kaiser. "They told us they'd like to be a distribution business and supply the products from Japan, but hadn't thought it was possible."
PwC specialists helped the company evaluate its options and execute a plan that included Chapter 11 bankruptcy for the manufacturing subsidiary. Negotiating from within the jurisdiction of bankruptcy court, PwC helped the company restructure approximately $350 million in liabilities, conduct a facility sale, and put in place a $25 million "debtor in possession" financing to ensure the manufacturer's liquidity for the duration of the bankruptcy proceedings.
This strategy enabled management to transition the business from a moderately-sized manufacturer of CRT glass to a small distributor of similar components manufactured elsewhere. Along the way, the company saved significant costs and provided uninterrupted service to those customers who continued to rely on glass components for CRT devices.
"Because the local market was rapidly declining for this company, continuing to manufacture in the US simply wasn't efficient," Kaiser explained. "Now, the company's business is scalable. As the market goes away, they can exit the business in an orderly manner."
"We were able to help because we've been through this so many times before," said Kaiser. "Often, companies aren't aware of the alternatives available to them. Our experience helps us identify a thorough resolution so that at the end of the day, you've got a sustainable business.
Getting the most value
Speed and attention to detail save millions in private equity carve-out
When two private equity firms saw an opportunity to invest in a wholesale distribution division being carved out of its parent corporation, the investors felt that success would hinge on certain fundamentals: getting the value right, closing the deal quickly, and operating effectively as a stand-alone entity immediately upon close.
Challenges to a successful deal
One significant issue with the deal was the transition of the division's captive insurance capability from seller to buyer. The seller had placed an unusual requirement on the private equity investors: the seller wanted to retroactively terminate liability insurance policies provided through their captive insurance company — an action that would have forced the investors to absorb more than $100 million dollars of self-insured liabilities and would have required coverage replacement costing millions of dollars. This was clearly an area of concern for the buyers.
PwC experience results in deal success and significant savings
The private equity investors recognized that the insurance question would have to be fully understood and successfully negotiated. They also saw a need to smoothly transition the company's day-to-day operations from the large corporate environment to that of a stand-alone entity. To accomplish these goals, the private equity fund investors looked to PwC for assistance.
In addition to advising their clients through a renegotiation that saved them $5 million, PwC's insurance risk management specialists were able to determine that the seller had overestimated the transferred liabilities by $17 million.
Tom Butler, partner in PwC's Private Company Services (PCS) practice, explained, "Both the private equity fund and management felt comfortable that we'd been through this a number of times. Not all of these transitions go well. What this company needed to do was to get through the transition comfortably and get to a normal run-rate state as quickly as possible." The PwC team brought the expertise needed to accelerate the close process and keep the company compliant with its new regulatory financial reporting requirements.
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