Mark Mansour was young, hungry and eager to establish his dealmaking credentials. Mal Mixon was an established entrepreneur who had already built a billion-dollar business at Invacare, but was always looking for that next great business deal.
Together, they went after Steelastic, a Cuyahoga Falls company up for auction in the 1990s after its parent company went into bankruptcy.
“To this day, I don’t know why Mal put his faith in me,” Mansour says. “He had a large risk appetite and he liked nichey, small businesses like Steelastic.”
The duo was ultimately outbid by a large Chicago-based fund, but a relationship was forged.
“It opened up a dialogue with Mal and his associates about wanting to establish a private equity presence where they could funnel their deal flow,” Mansour says. “They were getting inundated with deal opportunities and wanted a more diligent approach to evaluating transactions, as well as looking for transactions that didn’t happen to fall in their lap. So they hired me. I was 32 at the time and I had a lot of energy and enough smarts to get by, but was wildly inexperienced. But that was a seedling to MCM Capital.”
This week, we talk with MCM's senior managing partner about his approach to dealmaking and the value in looking forward, not back, when appraising deal opportunities.
How do you identity potential acquisition opportunities?
The businesses we acquire have certain things in common. They tend to be niche, high value-add manufacturers and, in some cases, distributors to business clients. They generally command very attractive growth margins and a high return on assets. The attractiveness from a 50,000-foot level is if you add a little bit of growth to these businesses, the incremental sales dollars can drop a disproportionate amount of profit to the bottom line.
From a deal standpoint, you are somewhat putting on blinders. Warren Buffett has said he usually misses out on the hottest technology stocks because he just doesn’t understand the opportunity and we’ve taken that approach. We focus on the things we understand. As a result, we may miss opportunities presented to us that don’t fit neatly in our box. When we get outside of our comfort zone, it creates more risk because we’re less capable of analyzing and assessing the opportunity.
How challenging is it to stick to your target profile?
We do a good job of marketing ourselves and getting our message out. If we do a good job of that, the quality of our deal flow goes up. While we may not have the same volume of opportunities as maybe a firm that takes a broader perspective to the market, the quality that gets into our deal funnel is quite high. The investment banking community, the business intermediary community, the business ownership community knows what we’re looking for. So the things that come across our desk tend to be closer to what we’re targeting than not. It’s a question we get all the time.
The most pressure we had to broaden our horizons was back in the late ’90s when anything with dot com on it was sexy. If you weren’t intimately involved in the internet, you weren’t going to exist in five years. We got pressure from some of our LPs. The questions were what are you guys doing about internet investing? Why aren’t you looking at internet-based businesses? Our answer was always the same. We don’t know that business.
What makes an investment opportunity intriguing?
It’s all about really defining the thing that makes your business unique and defensible. It’s finding that defensible attribute in the marketplace that allows you to generate robust margins. When we look at a business, if it’s a manufacturing company and it doesn’t have greater than 35 percent gross margin, we tend to get disinterested real fast. It suggests what they do is not that unique. If they are north of 35 percent, we see that they are doing something unique that is valued by the marketplace.
What have you done to differentiate your product or service offering? How differentiated is it? How difficult would it be to replace you as a supplier? Those are the questions that get asked when we present to our investment committee. Why does the business exist? How difficult is it to unseat them? Who are their competitors? What about their product offering is unique?
Which is more important: past performance or future potential?
Early in my career, I was more focused on the historical performance of a company. What’s it done over the last three years? I’ve learned that what is more important is looking at where the company is going to be in three years. It’s looking prospectively at the number of projects in that company’s pipeline and assessing whether any of them have legs that could drive long-term growth. You’re not going to always be right, and even when you’re right, it may not be to the extent that you hoped you were right. But sometimes you’ll exceed expectations. Bottom line, it’s more important to look forward than backward.