Case Study
Type of Industry Served:

Privately held firm specializing in providing highly specialized outsourcing services to both publicly traded companies and larger, privately held enterprises.

The Challenge

Maximize the Selling Company’s value without negatively impacting the existing customer base and, by default, the Selling Company’s cash flow and enterprise value.

THe story

As the industry in which the Selling Company operated was highly capital intensive and extremely technical, there were not a great number of potential candidates for the acquisition of the Selling Company. Additionally, it was an industry in which vertical integration was not applicable and there was little synergy to be created by marrying the Selling Company into other service related enterprises. It was determined the highest possible value would be achieved by approaching the two largest companies in the Western U.S. providing similar services. By doing so, it was felt the Selling Company’s operations would be integrated into the existing facilities currently operated by the potential acquirers and the highly specialized and expensive equipment held by the Selling Company would carry a higher utilization rate resulting in the ability of the Acquiring Company to defer the purchase of comparable equipment for a substantial period of time.

However, the issue relative to the customer base was extremely delicate as the majority of the existing customer contracts held by the Selling Company carried thirty day cancellation clauses allowing the customers to change providers without cause. Additionally, the industry was extremely price sensitive and it was not uncommon for a competitor to gain market share by price cutting its competitors. As a result, if news of the intended sale were to be discovered by the Selling Company’s competitors, no doubt existed that approaches would be made to the Selling Company’s customer base in an attempt to entice customers away from the Selling Company by either stressing the uncertainty that follows the sale of a company or by offering more aggressive pricing. Obviously, with the elimination of a large, independent competitor from the market place, the competitors were confident of recovering any revenue initially lost in acquiring the customer’s business at a later date due to significantly less competition.

In order to minimize the likelihood of one of the two major competitors aggressively pursuing the Selling Company’s customers, it was determined that both of the larger companies had to be approached simultaneously. In addition to the obvious “Non-Disclosure” documents and as part of the initial discussions, on behalf of the Selling Company, Gilman, Pope made it very clear that should its clients be approached by the Acquiring Company during the negotiation period, all acquisition negotiations would cease immediately and the Selling Company would only pursue an acquisition with the other candidate and an undisclosed, international party operating within the industry. As both candidates recognized the value in acquiring and integrating the Selling Company into their operations, an extraordinary degree of distance was given to the Selling Company’s customer base during the negotiation period. In fact, more so than would normally be the case. At this point, it was simply an issue of maintaining both Acquiring Companies’ interest in acquiring the Selling Company until such time as a definitive purchase agreement had been reached with one of the two candidates and value established.
The result

Due to the approach taken on behalf of the Selling Company, the outcome was beyond expectations. To begin with, none of the Selling Company’s customers were lost as a result of the process taken to sell the Company. Secondly, and ultimately the truest test, by Gilman, Pope identifying the proper groups to approach regarding the acquisition of the Selling Company, Gilman, Pope was able to maximize the Selling Company’s value well beyond that held prior to the transaction. By integrating the Selling Company’s operation into the Acquiring Company, a number of operating costs were no longer relevant. This allowed for the recasting of the income statements demonstrating a much greater cash flow and warranting a higher value for the Selling Company. Additionally, the fact the Acquiring Company would be able to defer substantial capital expenditures by maximizing the Selling Company’s equipment helped to defuse a portion of the acquisition costs and allowed the Acquiring Company to justify a higher price than initially expected. Both the Selling and Acquiring Companies gained significantly from the transaction.