MCM Capital Partners Crafts Creative Transaction Structure In Turbulent Times

As a business owner, you are the primary underwriter of every risk your company takes. Whether you’re committing capital to boost sales of existing products, launch new products or upgrade internal systems, the financial implications of your investments never stray far from your door.

After years spent building their companies from concept to reality and then guiding them through the ups and downs of normal business cycles, many owners look to shift their focus from capital appreciation to capital preservation. They want their companies to continue growing – in fact, today’s turbulent business climate demands it. However, they would prefer that risks associated with driving that growth be underwritten by someone else. In a perfect world, they would even manage to retain an equity stake in their businesses to reap the benefits of enhanced sales and revenues.

Not long ago, MicroGroup, Inc. (“MicroGroup”) CEO William Hulbig arrived at a similar juncture in his professional life. Hulbig founded Massachusetts-based MicroGroup in 1971 as a small micro-welding job shop and steadily grew it into the recognized North American leader in high-technology tube production, fittings, valves and unique tools. MicroGroup’s ability to complete complex micromachining, welding, cutting and lasering operations under one roof and ensure best-in-class delivery far surpassed the capabilities of its nearest competitors in the medical device and life sciences industry. The company also embraced a strong culture of employee empowerment and continuous improvement practices.

With the economy humming and MicroGroup generating record sales and profits, Hulbig decided it was an ideal time to diversify his wealth by pursuing a recapitalization of his business.  Hulbig approached several private equity firms hoping to find a stable, experienced partner that shared his vision for the company and offered the resources necessary to help him achieve it. Unfortunately, during his search for the right private equity partner, the economy came to a screeching halt.  MicroGroup’s sales and earnings were negatively impacted.   This resulted in a disappointing valuation for MicroGroup and ultimately his reluctant decision to defer the sale process until a friendlier economic climate.  MCM recognized MicroGroup was an attractive company whose sales and earnings were temporarily depressed due to unfavorable general economic conditions.  Hulbig recognized MCM was the right fit with both he and his management team.  However, their challenge was significant.  Unfortunately, nearly a year after Bill began approaching private equity firms, the country remained in the grip of a recession, and MicroGroup’s sales had softened with no clear end in sight. As Mark Mansour, MCM Capital Partners Managing Director, recalled, “We needed to put together an attractive proposal for Bill in a down year without making him feel like he was leaving money on the table due to a drop off in sales. We knew we would end up underwriting a fair amount of risk, but we believed in MicroGroup and its management team, so we worked hard at developing a creative solution.” With that in mind, MCM proposed a novel structure providing Hulbig a substantial amount of personal liquidity while retaining meaningful ownership and, importantly, an opportunity to buy back an additional 10% of the common equity for $1 upon achieving certain modest value hurdles.  As a consequence, Hulbig was not unduly penalized by the softness currently confronting the company.    

In the end, Hulbig teamed with a strong financial partner with exceptional banking relationships who valued the company’s existing culture and incumbent management team, including himself, and was willing to help nurture MicroGroup’s organic growth.

Moving Forward: First 100 Days Post Transaction

Immediately after the closing, MCM sat down with Hulbig and other company executives and formalized a plan to reignite the company’s growth and bring it into a new capital appreciation mode. MCM created an outstanding board of directors for MicroGroup and appointed members of its own Board of Operating Executives to serve on it, offer fresh perspectives and identify value drivers within the company. Additionally, MCM encouraged Hulbig and other executives to hire additional sales staff and make necessary capital expenditures, including a state-of-the-art Enterprise Resource Planning (“ERP”) system. As Mansour offered, “Our role is to support incumbent management and management teams. Whether it’s a buyout or recapitalization, our predisposition is to let them effectively run the business. A good analogy is that of a stew: if management is the meat and potatoes, MCM is the salt and pepper. That doesn’t mean we won’t make changes if we see the need to. But we strive to make necessary investments and ensure that the company is being run well so that when conditions merit, management and employees come out of the gate charging.”

Soon after the recapitalization took effect, MicroGroup’s sales stabilized below the company’s expectations and remained at or near that level for almost 18 months. However, MCM’s Principals remained committed to management and encouraged Hulbig and others to implement their plans. That commitment, combined with MCM’s investment in additional human and IT capital, eventually paid off: Within two years, MicroGroup achieved nearly 33 percent sales and earnings growth. Clearly, the company had begun to reap substantial benefits from its investments.

End of the Story

For more information on MCM Capital Partners, call 216/514-1840 or visit www.mcmcapital.com.