Tackling the ACG Cup
Two weeks of being an M&A Advisor
by George Selinsky
Since 2009, the New York Association for Corporate Growth has hosted an annual mergers and acquisition case competition. Competitors include MBA students from NYU, Cornell, Fordham, Pace, St. John’s, Hofstra, and of course, Baruch.
The competition consists of a case study on a merger or acquisition of a middle market sized company. The participants must act in the shoes of an investment bank, advising the buy side or sell side on the transaction. The winning teams get a cash prize and some publicity, while all the participants get an amazing real life experience working as investment bankers, albeit for two weeks and without the late night steak dinners.
Baruch had placed second in the 2010 ACG competition, and first last year. This year, Abhinav Goel, Justin Karr, Abhijeet Dhamankar, and myself had decided to team up as “Flatiron Partners” and take on the challenge of defending Baruch’s title.
In the first round, we were competing against our fellow Baruchians for the right to go on to the second round. Initially, the competition had several dozen willing participants, but that number dwindled after many had gotten the case and saw just how involved it was. One person jocularly posted in their facebook status: “One week to do an entire M&A analysis? Crazy!”
The case went as follows: the founders of a well to do staffing company which focused on the specialized IT labor sector were looking to cash out some of their holdings. The company was privately held and the only shareholders were the three founders. These talented guys over the course of 9 years were generating very strong operating margins and cash flow. Two wanted to stay in the business, feeling it had room to continue growing, while one decided it was time to fold up shop and do something else.
From the buy side, there were two offers: one from a private equity firm which was willing to buy a minority stake, and another from a much larger competitor who wanted to acquire the whole firm and merge it to take advantage of its expertise in the specialized IT labor market (an attractive segment based on the evidence we were given in the case).
The task we had before us was to understand and value the nature of the offers that were being proposed, both from a quantitative and qualitative perspective. This took some careful analysis, because you have to consider not just the cash being put on the table, but the nature of the relationship between the buyer and seller post-transaction, as well as the risks and opportunity costs involved.
We then had to present this analysis to the sell side, the IT firm, and give them a recommendation as to what to do. The sell side would be represented by their board of directors, which was in fact composed by people who had worked in senior roles of corporate finance, private equity, and investment banking (our judges). Each of them could interrupt our presentation at any time with questions about our analysis or recommendations.
As a team, we had to use the knowledge we gained in school as well as our work experience to do a solid analysis and propose a convincing, well thought out recommendation. A major asset was that all four of us had taken Professor Rajarishi Nahata’s class, Venture Capital and Entrepreneurial Finance (FIN 9774), which taught us how to evaluate private equity transactions from numerous perspectives.
The moment we got the case we were on it. Power point slides were created, financial models were constructed, and intense discussions ensued about what each transaction would mean for each of the parties involved. It was a challenging task as the transaction was somewhat complicated: the private equity firm in their offer was not simply buying stock, but also introduced debt into the unleveraged company (a leveraged recap).
This recapitalization component was somewhat of a fly in the ointment, forcing us to carefully parse the case’s language to determine the order of events and the total amount of consideration to the buyers (we were not permitted to ask the case writers for clarifications). In fact, we only agreed on the meaning of the case’s language just one day before our presentation! Despite this issue, we had managed over the course of the week to agree on which deal would be better, and a good course of action for the sellers.
When possible, we tried to meet in person to work on the case together. Other times, we would communicate via skype and email as we balanced the case with our academic and professional commitments.
We were up late the day before the presentation, finalizing our power point and agonizing over several important details. The morning of the presentation we were proof-reading the document and still making various adjustments to numbers, fonts, tables, and formatting. Our final printout of the pitchbook was ready two hours before we went on. This is hardly an unusual occurrence in this business; investment bankers often get various last minute requests from their clients and are up late at night making changes, while constantly checking their work for errors and optimizing the presentation format.
The presentation itself was quite intense. Eight board members were seated and waiting for us to impress them. Fortunately we had planned out our presentation pretty well and rehearsed it, so we were able to go in with a sense of confidence.
As soon as we began speaking, the board members began looking through our pitchbooks and making notes with their pens, not making much eye contact. After a while, they began interjecting various questions. We were asked about the methods we chose to value the company, as well as various deal terms we were proposing. Our answers had to be on the money and concise, it was also important to uphold a professional tone and avoid any hint of defensiveness.
After each team presented, we were asked to come in all together. Our team, Flatiron Partners, were announced as the winners. The judges had mentioned that their decision was a close call. While many had gotten the numbers correct, the differentiating factors were more qualitative, e.g. the number of deal options considered, strategic recommendation, and presentation skills. It was a particular honor for us, as we knew most of our competitors quite well and can attest that they are smart and hard working.
The judges went on to say that they were very pleased with the overall quality of our school’s presentations, one of them remarking that it was a considerable improvement over what they had seen at some of the other schools. We were very honored and pumped to go on to the second round.
After a short break, our team got together and analyzed our first round presentation in order to glean some lessons for the second round. We looked at everything, from the financial modeling down to the PPT design. Shortly afterward, we were given the next round of case materials and off we went.
This time, we were given the same case but new circumstances: the staffing firm decided to reject the full buyout by their competitor, fearing that upon due diligence the buyer could decide to walk away from the table with the staffing firm’s ‘secret sauce’ in hand. One of the company founders was definitely leaving and wanted to cash out entirely, the other two want to stay on board but also wanted some cash in hand. A new private equity firm had taken interest in the company and wanted to do a minority deal with a leveraged recapitalization. We were asked to advise the buy side, representing the private equity firm in the transaction.
This round had a new complicating factor, we had to know how to deal with redeemable preferred stock (which also goes by the name puttable, participating preferred). We also had a limit on the amount of leverage we could use in the deal, which is a reflection of the new reality we are in today (most current LBOs use under 50% of leverage). We had to make sure that the terms we proposed weren’t too stringent: the company was pretty attractive and could easily field pretty solid offers from our competitors. Lastly, we were told that time was of the essence. If this deal was going to happen, decisions had to be made now.
Our mission was to give our client ideas on how to do this deal without losing it to competitors, while achieving its target rate of return. In doing so we had to ponder multiple options, some of which would offer a lower IRR than the private equity’s hurtle rate of 25%, others which would require pushing the banks for more leverage or asking management to make various concessions. We were explicitly told that massaging our assumptions about the company’s exit multiple beyond current market expectations was not an acceptable option. Indeed this makes very good sense; trying to curve fit buy side valuations to a higher IRR is asking for a disaster (remember the tech bubble?).
After a lot of evaluation and debate, we got our analysis and recommendations down and began our rehearsal process, making simultaneous changes to the power point. Since we put a number of options on the table for our clients, we had to be careful not to overrun our 20 minute time limit without sacrificing clarity. We also had to watch the clock carefully: two of our teammates had to be sure not to miss a major midterm, and we needed sufficient lead time to look at a check printout of our work and put in the print job.
The morning of the presentation we arrived early and continued rehearsing. When we started setting up in the presentation room, we were particularly happy that we planned the night before to take three laptops with us – the main designated laptop would not function with the projector.
Our presentation was the first one for the day. It went along pretty well, and fortunately we ran right on time. Some of the questions were trickier this time around, but we felt pretty confident in how we were able to respond. Then came a waiting period, where our competitors went in and out of the presentation room while we watched them and tried to parse their body language. During that time, we were asked by ACG New York’s executive director Bobby Blumenfeld to come in for a brief video interview where we discussed our experience.
After all the teams had presented, we were all invited to a luncheon event where the winning teams were to be announced. We were all seated separately, to encourage us to have an opportunity to network with other ACG members. Some of the judges came up to us and congratulated us on a job well done.
The second place winner was announced first: Baruch College. The team from Fordham had taken first place. Of course, we were somewhat disappointed that we couldn’t duplicate the success of last year’s Baruch team. Nonetheless, we had the honor of having placed Baruch in the winning circle three times in a row. We also managed to bolster our knowledge and skills, experience the thrill of competition, and have our moments of fun as well. After all, it’s not every day you get to present in front of senior level finance executives!
I truly hope that next year’s first place team comes from Baruch. To that end, I’d like to offer some tips based on our collective experience:
- Take the necessary coursework. We all found that Finance 9774 was a great asset to us. In general, being a second year MBA is a big plus. That should not discourage you from trying if you’re a first year student. Even if you don’t win the first round, you learn a lot just by doing.
- Team up with people that have complementary work experience and skills. Our collective experience was in investment banking, private equity, international business, and law. Each of us brought something unique to the table.
- Try to minimize your external commitments during the competition. This is perhaps easier said than done, as the dates of the first and second round can change even after they get announced. While you can’t change midterms or invitations for job interviews, try to optimize your availability as best as you can.
- Debate is a good thing. The more you discuss and challenge, the more full your analysis will be and the more ready you will be for questions. At the same time, know when to table things or move on. You need to budget your time effectively.
- Obsessing over details is important. Its very critical to be on the money not only with the numbers and recommendations, but the form of the presentation itself. Table formatting and colors may seem like fine details, but they can make you stand out. Don’t be cheap – definitely print our your pitchbooks in color and have them bound. Don’t show up with a poorly fitting suit or wrinkled jacket. Look and act the part as much as you can.
- Use the time in between rounds to review your work and figure out where you could have improved. This has an added benefit of making you more familiar with the case, which will be reiterated and embellished in the second round.
- Rehearse your presentation as much as possible. We got up earlier the morning of our presentation and did some extra run-throughs. It definitely helped us shave down our time and be more confident.
- Bring backups for everything. Having only one laptop would have put us in the hot seat when it came to round II.
With that said, I eagerly await the opportunity of congratulating the next Baruch team for making it into the winner’s circle…