Not so long ago in a galaxy not that far away, Mark Ross helped George Lucas complete a $4 billion deal to sell Lucasfilm Ltd. to The Walt Disney Co. While he didn’t need to use the force to make it happen, the nearly 12 months Ross spent conducting sell side due diligence to prepare the legendary film company for sale in 2012 was a lot of work. It was also an experience he’ll never forget, says Ross, Northeast Ohio Managing Partner at PwC.
“Lucas wanted a very significant dollar amount for his business and he got it,” Ross says. “Those brands — Star Wars, Indiana Jones and the others — they were his babies. They were part of him. Disney was the only company he was talking to because he wanted those babies to grow and continue well beyond his time with the business.”
Ross worked with Lucasfilm to calculate the company’s future earnings potential, data that would enable Disney to make a more informed decision about the purchase.
“Our team assisted the company in developing a forecast for where the third trilogy would go, leveraging industry knowledge to actually put together something that was supportable and believable,” Ross says. “If the film grosses this much at the box office, this is what happens with DVD sales and on-demand sales. We had to consider how technology has changed that formula over time to be able to build that story.”
When Ross isn’t working with visionary filmmakers or helping the New York Stock Exchange buy the European stock exchange Euronext — a deal he helped guide to completion back in 2006 — he’s leading transactions that range in value from $20 million to $10 billion. His specialty is deals in the manufacturing, automotive, retail, defense, technology and chemical industries.
Smart Business Dealmakers spoke with Ross about the critical role of strategy and preparation when it comes to dealmaking and how he views the pace of M&A activity in Cleveland.
Doing the prep work
Develop a story that makes sense to a party that may not know your company at all. This is absolutely critical and sometimes it takes a lot of time to do it. In the case of Lucasfilm, it certainly did because it’s a complicated, yet thrilling business asset to have been working on. The culture and what Disney was prepared to do to expand and grow the business, even though Lucas wasn’t necessarily going to be actively involved with it, that was very important to him.
Prepare and package the business for sale. The team that I led spent nine to 12 months working on the project before any information was shared with Disney. As a private company with personal assets comingled with the business, actually doing enough sell side due diligence to be able to present that business in a manner that a company like Disney could come in and do their own acquisition diligence — and get it done quickly once it started — was really important.
When you boil it down, it’s about having a strong strategic rationale. Why are you doing the transaction? Once you understand that, there needs to be a relentless focus on execution. One reason why a large percentage of M&A transactions never reach their projected goals is a lack of clarity around that strategic rationale. It could be exaggerated or overly optimistic projections around synergies or falling in love with a deal that you can’t objectively decide to walk away from. Effective execution often requires a company to acknowledge that they can’t do everything themselves and they may need some help. Be willing to bring in the right investment banker or support from accountants, lawyers and business folks. That is often the answer to make sure you get that execution piece right.
The biggest way to lose value in a deal is to underestimate the tailoring a contract might need to ensure you get what you paid for. I’ve never worked on an acquisition or a divestiture that didn’t benefit significantly from tailoring the contract to the transaction at hand. What is often overlooked both on the acquisition and divestiture side is the importance of a well-worded purchase and sale agreement. There are standard terms and conditions that are often in an initial draft, but things could be missed that would protect the seller or protect the value that was arrived at through negotiation. On the buy side, it’s making sure the various commitments and terms that the seller was making are valid and appropriate.
When you’re ready to sell
Take a third-party, independent look at the financial details of your business. Just because somebody has a GAAP set of financial statements, that doesn’t mean it’s good to go. There are often non-recurring or one-time adjustments in financial statements that are correct for GAAP, but may need to be presented differently for a third party to be able to understand the trends of the business.
In the case of the Lucas transaction, there were various personal assets that were part of the entity that needed to be pulled out. When a large public company is getting ready to sell something that’s a division or a product line, the more embedded it is in the business, the harder it is to sell.
Middle market and private companies often have different motivations for making a deal. In other words, they don’t have third-party, public shareholders. They’ve got owners who often are more focused on the tax treatments of information as they are on GAAP or the economic treatment of items. If those costs running through the business aren’t going to recur for the buyer, you need to make adjustments. Get a fresh look at what you’re trying to sell from a third party’s eyes, from a buyer’s perspective, from somebody who can play devil’s advocate with that information.
When a deal falls apart
Maybe you lost because your price wasn’t high enough. That might end up being a good thing. Acknowledging the discipline that you have in terms of the price you’re willing to offer is not a bad thing. If part of your process is to apply some financial constraint to what you’re doing and that is the reason you don’t get the deal done, it could be that somebody else overpaid and that’s OK.
The Last Word
When I look back at the past 12 to 18 months, virtually all of the clients I worked with have been involved in some type of acquisition or divestiture transaction of significance. It has been and is likely to continue to be a really strong market for both larger corporates and the middle market. You go back 20 years and Cleveland and Northeast Ohio hasn’t always ended up on the right side of acquisitions. Many of our large public companies don’t exist anymore as Cleveland public companies. But in the last couple years, you see companies like Diebold, Parker Hannifin, Sherwin-Williams and KeyBank — all these companies have done something significant in terms of building their footprints. For somebody who has been around Cleveland most of my life, it’s nice to see we’re on the right side of growth for some of our larger and really important companies.
How to reach: PwC, www.pwc.com