Friday, June 17, 2011

Exit Strategy Development - a brief historical "look-back" at ARC's development

Recently, I did a post on this blog-site about “exit strategy”, basically posing this question to reprographers, “do you have one …. or have you not yet gotten around to figuring out what your exit strategy is going be?”

I remarked the other day, to a new young friend who is “kinda” involved in the “printing and graphics industry”, that I’m now “so old” that it won’t be too long before GRANDCHILDREN, of reprographics business owners I met when we are all still fairly young, assume CEO positions that were previously held by their grandfathers and fathers (or, to be politically correct, by their grandmothers and mothers.) Businesses that are being transferred from one generation to another don’t spend much time on “external” exit strategy development, but you can be sure that there are lots of “internal” discussions about how grandpa and dad are going to “be retired” (be comfortably retired, hopefully) so that the next generation can assume command.

Anyway, this post (the one below) is actually related to external “exit strategy” development. Sometimes, exit strategies are “long term” plays. Someone recently asked me, “why did Mohan retire from ARC?” My response, “well, he’s not totally retired from ARC, he still owns a lot of ARC stock, but, for the most part, he is retired from active management, and that’s because he planned his exit strategy well in advance of actually activating it. He would not have resigned from active management if he had not wanted to retire from “active duty” the business.”

Many younger reprographers are not aware of how ARC’s management team positioned ARC to grow, early on in ARC’s development. So, for that reason, I decided to publish this post as kind of a “history lesson” for younger reprographers.

When I first met Mohan (in Oct 1988, when I was out visiting in L.A.), J.C. Smith, the then owner of Ford Graphics (Oct 1988), introduced Mohan as his relatively “new” CFO. At some point not too long after that, Mohan purchased the company and J.C. Smith retired from the business. (Perhaps Suri was already Mohan’s partner at that point in time, but I’m not sure about that.) One of the early large acquisitions that Ford Graphics completed was the acquisition of OCB Reprographics. That acquisition was completed with the financial assistance of Bill Thomas (yes, the same Bill Thomas who, together with his family, owns Thomas Reprographics.)

After completing 5 (yes, only 5) acquisitions (see below), ARC’s owners made a very big decision, one that later proved to be an amazingly wise decision for ARC’s owners. They sold off half of their shares to ZS Fund, a private equity group. ZS Fund helped ARC grow significantly over the next few years. ZS Fund cashed out (exercised its exit strategy) when it sold its interests in ARC to Code Hennessy & Simons, another, larger private equity group. It was Code Hennessy & Simons that helped ARC go public. Code Hennessy & Simons, for the most part, exercised its exit strategy (pretty much) in two phases – first phase was ARC’s IPO, second phase was the secondary offering ARC completed (when ARC’s shares were around $32!)

Okay, so without further commentary, here’s a “look back” at some of ARC’s development history…..

From the web-site of …………

ZS Fund, LP

We are a private equity firm engaged in making long-term investments in successful middle-market companies. Since 1985, we have focused on transactions that provide liquidity to business owners while enabling them to maintain a significant ownership stake and keep their company independent. Our strengths are understanding the objectives of business owners, structuring transactions that respond to these objectives, and being constructive partners to help increase the value of the businesses in which we invest.

It May Be Time For A Change. How It Happens Is Your Choice.

For years your business has been your life. You have invested endless hours building it, managing it and doing everything within your power to guide it toward success. You want to continue to build your business; however, there are estate, liquidity and/or shareholder issues that have led you to conclude that you must do something to take care of yourself, your family and your business.

Example of Industry Consolidations:

Over a nine year period, the principals of what is now American Reprographics Company (“ARC”) acquired majority interests in five west coast reprographics companies using their own capital as well as loans which they personally guaranteed. Recognizing the benefits of scale and having been successful in their prior acquisition efforts, the principals were eager to lead a consolidation of the fragmented reprographics industry. However, the principals did not have the resources to lead the consolidation independently and thus considered seeking an experienced partner.

ZS structured a transaction whereby the principals received a substantial amount of cash, some notes, and a 50% ownership stake in ARC, a newly-formed company which purchased the five predecessor companies. In addition, the principals were relieved of their personal guarantees and had the ability to earn additional consideration based upon ARC’s post-closing performance.

ZS provided the necessary equity capital and arranged for bank financing to allow the Company to continue making acquisitions. In fact, over the ensuing 30 months, ZS helped ARC acquire 38 companies and grow its revenues from $75 million to $300 million. During that time period, management significantly improved the operating margins of the acquired companies and continued to grow the business internally.

ZS and the principals then structured a second recapitalization in which management received additional liquidity (greater than two times the original amount) without selling any of their equity, and ZS sold substantially all of its ownership interest to a new private equity firm chosen by management. Each of the recapitalizations were “win-win” situations from the perspective of both ZS and the principals.

1133 Avenue of the Americas New York, NY 10036

Phone 212/398-6200 Fax 212/398-1808

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