Monday, March 20, 2006
Score—Financial Buyers, Five; Strategic Buyers, Nothing
Michaels Stores Inc., the nation's largest arts-and-crafts retailer, is expected to announce that it is exploring "strategic alternatives," a decision that could lead to the sale of the company, which has a $4.61 billion market capitalization, according to people familiar with the matter.
—Wall Street Journal
A small, closely held company with which I am familiar decided to put itself up for sale last year.
The company is a perfectly decent little manufacturer of glass fiber yarn—a sort of poor-man’s Corning. It's had a rocky history, having been in and out of bankruptcy, but management did a good job of turning things around and decided, in today’s vernacular, to “explore strategic alternatives.”
Being small and closely held, however, the company was on nobody’s radar screen—and the Wall Street Journal didn’t even report on the fact that it had put itself up for sale.
Nevertheless, according to the information statement mailed out to shareholders, a total of 105 potential buyers signed confidentiality agreements to look at the financial package.
And of those 105 potential buyers, 15 were “strategic or industry buyers” while 90 were “financial buyers and capital providers.”
(This kind of information is contained in the “Background to Merger” discussion which is always the most interesting part of a merger or takeover information statement. I recommend reading as many as you can get your hands on.)
Back to those 105 “potential buyers” for our little glass fiber company: 21 of them expressed interest in pursuing further negotiations, and out of those 21, 11 actually went into a second round of negotiations, out of which “five potential buyers submitted second-round bids.”
Now, you might expect a small glass fiber yarn manufacturer to prove most valuable to other industry players—the original group of 15 “strategic or industry buyers” out of the first 105 willing to sign confidentiality agreements. After all, an industry buyer would be best able to assess the value of the assets and derive the greatest benefit both in adding sales and being able to reduce costs.
You might expect that, and you would be wrong: all five of the second round bids “were from financial buyers.”
Last week at the Bank of America consumer conference, one of the most crowded presentations was not current investor fave Coldwater Creek or bull/bear tug-of-war Toll Brothers: it was a panel discussion among representatives from several large private equity firms.
The private equity cycle, which today looks to engulf Michael’s Stores, is nowhere near finished.
If our experience with a tiny glass fiber yarn company is any indication, this feeding frenzy is going to make the Drexel/Milken years look positively tame.
I Am Not Making This Up
© 2005 Jeff Matthews
The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.
Posted by Jeff Matthews at 6:56 AM