Manufacturer of stainless steel tubing, valves, fittings, and other components serving the medical device and life science industry.
Situation Analysis
William 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 machining, 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.
In 1998, Hulbig invested $9 million in new machinery and equipment to expand service to his existing customer base and develop new sales channels. This initiative was funded almost entirely through bank debt, a significant portion of which he personally guaranteed. Hulbig’s investment paid off with dramatic sales and earnings growth of nearly $10 million through 2001. Though the company’s performance had justified Hulbig’s investment of three years earlier, he knew that driving the next round of growth would entail either selective acquisitions or additional investments in capital goods and information technology. “Bill helped the company achieve a good run and nearly double sales over that short three-year period, but to expand that growth, he’d have to come up with additional equity capital or guaranteed debt,” said Mark Mansour, Senior Managing Partner of Cleveland-based MCM Capital Partners. “As their careers mature, executives like Bill get to the point where they don’t want to take on additional debt, but they still want to keep their companies in a growth mode and share in the upside.”
Indeed, Hulbig’s appetite to assume financial risk was tempered by a desire to achieve personal liquidity and diversify his holdings. As MicroGroup’s founder and CEO, he also felt strongly about ensuring an adequate supply of capital to fuel the company’s continued growth – and he sought to maintain an equity stake and managerial control over its operation.
Finding The Right Private Equity Partner
Hulbig began to explore his options. Initially, he considered the merits of an Employee Stock Ownership Program (“ESOP”). As a tax-advantaged transaction, an ESOP would have transferred ownership of a portion of the company to MicroGroup’s employees and netted Hulbig a significant cash payout at close, much of which would have been tax-exempt. However, an ESOP posed several challenges. First, Hulbig would have remained the primary steward of his business and would not have been relieved of the financial responsibility he currently had with MicroGroup. During times of stagnation or even recession, the ESOP’s lending partner would invariably look to him to provide additional equity to support the business. Secondly, an ESOP didn’t provide the additional capital that Hulbig sought for further investments in equipment, IT, or acquisitions. Lastly, Hulbig remained bullish on the prospects for MicroGroup, but he was wary of tying up too large a percentage of his employees’ retirement assets in one place – namely, the company itself. “It’s unwise for people to have their retirement nest eggs tied up disproportionately in one basket,” Mansour said. “Likewise, the more successful a business owner is, the greater percentage of his or her net worth is committed to that one asset. Monetizing it at the right time can be a very prudent course of action. And if you structure it so as to retain equity, you’ll share in the upside moving forward while keeping your risk low.”
In the end, Hulbig sought 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.
Investing More Than Just Money In Portfolio Companies
Founded in 1992, MCM Capital Partners is a lower middle market private equity firm focused on acquiring niche manufacturers and value added distributors generating $10M to $50M in annual revenue with a sustainable competitive advantage. MCM’s Principals are seasoned professionals who bring a well-rounded skillset to support management in accelerating growth including financial, operating, engineering and business development support.
In 1998, MCM’s Principals had successfully raised $50 million as part of their first institutional fund, MCM Capital Partners, L.P. (“Fund I”) and second overall pool of investment capital. Between 1992 and 1997, MCM funded the acquisition of six companies on a deal-by-deal basis, generating over a five-times cash on cash return and a 41 percent gross internal rate of return (“IRR”) for its investors.
Hulbig had approached several private equity firms during 2001, hoping to find a stable, experienced partner that shared his vision for the company and offered the resources necessary to help him achieve it. Concurrent with that, MCM’s Principals had identified the medical device and life sciences industry as ripe for investment of Fund I capital. Before long, they learned about MicroGroup through contacts in their extensive deal sourcing network. The Principals met with Hulbig, toured MicroGroup’s 80,000 square-foot facility, conducted additional due diligence on the company, and eventually sat down amongst themselves to structure a creative and attractive package for Hulbig’s consideration.
Their challenge was significant. In 2001, the U.S. economy remained in the grip of a recession, and MicroGroup’s sales had softened with no clear end in sight. As Mansour 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.”
In the end, MCM proposed a leveraged recapitalization that would accomplish each of Hulbig’s stated goals. A recapitalization is a financial transaction customized to provide existing shareholders a substantial amount of liquidity while allocating a large portion of equity – typically 20 to 40 percent – to selling shareholders and the incumbent management team. For Hulbig, this offered several significant benefits:
Moving Forward
MCM engineered the leveraged recapitalization to meet each requirement stated by Hulbig at the outset. He was comforted by MCM’s long track record of success in growing other portfolio companies, and he appreciated the firm’s strong support of MicroGroup’s incumbent management. The two parties agreed to terms in principal and began the process of completing a transaction, which closed in May 2002.
Immediately, 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 a board of directors for MicroGroup and appointed members of its own Advisory Board 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.
“We bring a very strong growth commitment to each of our portfolio companies,” added Mark Mansour. “We didn’t go into MicroGroup and demand performance that was unrealistic. We’re patient, and we have both the willingness and the ability to provide follow-on capital to support our investments.
“We are eager and comfortable working with companies like MicroGroup in the smaller end of the middle market,” Mansour added. “Our experience and know-how have consistently paid dividends for executives, employees, and investors.”
