Operation Lick the Cookie

Dave, our VP of marketing, loped into my office. “It just came over the wires,” he said. “They declared bankruptcy.”

“OK, time to place the call,” I said.

We’d been waiting for this for a while. The company Dave was talking about was a rollup that had gobbled up a wide variety of travel companies in the U.S. and Canada over the preceding several years. Rollups sound like a good idea: raise some money, consolidate a fragmented industry and realize the benefits of running a scale operation.

However, as with many rollups, it seemed that these guys had begun with a disciplined approach to acquisitions, but over time, under pressure to grow, had more or less bought whatever was available. The result was a grab bag of companies, some quite attractive and others less so. We had our eyes on one in particular.

This was over a decade ago when I was President of a medium-sized group tour operator. We sent groups of U.S. and Canadian adults on tours all over the world. The bankrupt company owned one of our competitors. Let’s call it Grand Excursions. GEx offered products that were pretty similar to ours in terms of price, destination, etc. While we didn’t know its exact size, we believed it was a fair bit bigger than we were. And, now, it was in serious trouble.

I knew a senior guy at the parent company, a smart and decent guy I will call Tommy. I rang him up and told him I’d heard the news. I said I was sorry for the position in which he found himself. I was. I thought he was in a mess that was not really of his making.

“It’s terrible,” he said. “This is peak season. We have Grand Excursions groups that are going out in the next few days, and others that are stuck in Europe, and we’re shut down. We don’t even have a system in place to answer the phone.”

I had been calling mostly to express sympathy and to find out when the bankruptcy hearing would be. I was hoping I would be able to convince my bosses to make a play for GEx, but I recognized an opportunity when I heard one. “We’ll do it,” I blurted. “Route the 800 number to us, and we’ll take the calls.”

“What will you say to them?” he asked.

“Whatever you want,” I replied.

And that was basically what happened. By the end of the day, we had a script in place and a team of people answering calls from nervous GEx customers. We helped the people on tour to rebook their tickets to get home — fortunately airfare is paid in advance — and we gave the unfortunate customers who were awaiting departure (many of whom had paid in full) what information and comfort we could.

More importantly for us, we had a negotiated a simple agreement with the bankrupt parent. In exchange for providing these services, we got a limited right to market our tours to their entire customer base. For a business like ours, this past traveler list, plus the right to reference Grand Excursions in our marketing, was solid gold.

I met with my heads of sales and customer service. “Okay,” I said. “We have permission to contact all of these customers. Over the next few days, I want to reach each and every one. I want them all to know the name of the company that stepped up to help them when Grand Excursions got into trouble. I want us to be friendly, and I want us to be helpful. I want them to remember us.”

“You’re like a little kid who wants to lick all the cookies so no one else wants to eat them,” said Kendra, our VP of customer service.

“That’s perfect,” I said. “Let Operation Lick the Cookie begin!”

“We should make T-shirts,” said Dave.

I will focus mostly on what happened next, but, first, I want to point out that none of it would have been possible if we hadn’t had a terrific team that could turn on a dime and start solving problems for these customers. Remember, we didn’t know them, and we had to figure out answers on the fly. While I moved on to the next bit, our team quickly put together a plan to get the data into our system and to train our people on how to triage the calls. Without our ability to do that, what followed would have been impossible.

The next step was a meeting with the Chairman and the CEO of my company to try to secure support for an acquisition. As we waited outside the Chairman’s office, I felt confident: GEx was a perfect fit for us. No other company in the market was more similar to us.

I saw this as an opportunity to more than double the size of the business at the stroke of a pen…

And I knew that our teams could sell and produce the product with no real learning curve.There were two other important factors. First, this was going to happen fast. I doubted most financial buyers would have sufficient time to get comfortable enough to make an offer in time for the bankruptcy hearing, and I thought many of the strategic buyers, our competitors, would be too cash constrained to take it on.

Equally important, I had access to George, an experienced deal attorney who was trusted by me, by the Chairman and by the CEO. I had never bought a company before, and I knew I needed help. Napoleon used to ask not just if a general was good, but also if he was lucky. Taken together, these things seemed to equal good fortune.

*****

“I have no interest in acquiring another tour operator in the U.S.”

This was the Chairman’s response when I asked him why he was giving us such an incredibly small budget to try to buy GEx. The number he quoted was about 5% of what I thought the company was worth. It was so low, I thought it would be insulting. Basically, the only way it would work would be if we were the only bidder.

We restated our (really quite excellent) arguments as to why we should buy the company. We were well prepared with product comparisons and a high level integration plan.

He listened politely, nodding in the appropriate places.

“So, can we have more money?” I asked.

“No,” he said.

I wanted to keep arguing, but George, recognizing a decision had been made, cut me off. “Fair enough,” he said. “But we’re going to the bankruptcy hearing anyway, okay?” We explained the marketing rights agreement. “It has some value to us, but maybe we can sell it for more to whomever buys Grand Excursions.”

The Chairman smiled mischievously at us. “Sure,” he said.

*****
The next day we were standing outside a bankruptcy court in Miami. Several bidders for GEx had emerged, and I watched morosely as the price crept slowly up. It was already double what we were authorized to pay. “Someone is going to basically steal this thing,” I said.

“Patience,” George replied with a calmness that struck me as both Yoda-like and seriously annoying.

As the deadline for the court hearing approached, a new buyer emerged, and the price more than doubled. This buyer, another tour operator, had left the other bidders — bottom fishers one and all — in the dust. I still thought they would be getting a bargain.

There was just one problem. This new buyer had read the disclosures, knew about our marketing rights contract, and apparently told the seller that — unless that went away — there was no deal. The “seller” in this case was the senior lender who had loaned the rollup a large amount of money. I will call them Wolf Capital.

Shortly, we were in a negotiation with two sharpies from Wolf Capital. They may not have been experts in our business, but they knew that they had a good buyer lined up — remember, this offer was double the next highest one — and that there would be no sale unless our contract was voided.

They asked us what we would sell the marketing right for — essentially, they’d be paying us to go away. We named a large figure. They countered, offering us precisely half of what we had asked for. We pushed for more, but they stuck to their offer. When it was apparent that they weren’t moving, we asked for a few minutes to discuss in private.

As I evaluated their proposal, two things were running through my mind. First, it was a lot of money. (In fact, it was several times the “budget” we had been authorized to pay for the entire company!) I had asked Dave to estimate the value of the marketing rights the contract provided. He believed that the contract, if we exercised it, was worth somewhere between 10% and 15% of what was now being offered.

Second, I was thinking about my P&L. It has been a rough year. We were still getting back on our feet in the aftermath of 9/11, and, while revenue was growing, profits were anemic. We were going to more or less break even on the year, so this money represented all of the profit we would report for the year.

We called up the Chairman and explained the situation.

“What do you want to do?” he asked.

“I want to take it,” I said. “It’s a good deal. Very good, in fact.”

“What about you, George?”

George gave me an apologetic smile. “I think we should say no. I think we can get more.”

“We could also lose the whole thing,” I warned. I restated my argument that this was a good deal and pointed out that it would be 100% of our profits for the year. “There’s not much time left before the hearing starts.”

The Chairman only thought about it for a moment. “Tell them ‘no,’” he said. “See what you can get. If we lose, we lose.”

We went back to the Wolf Capital guys and told them we were rejecting their offer. “You can double your offer or we’ll exercise our right.”

Now it was their turn to walk away and discuss. The hearing was about to begin, so the clock was ticking.

After an interminably long five minutes, they came back and agreed to our terms. Well, pretty much. For some reason, they offered us 97% of what we had asked for.

We didn’t hesitate. “Deal,” I said.

What did I learn from all this? Five things:

  1. You don’t ask, you don’t get. If I hadn’t picked up the phone and called the GEx guy, in the first place, we wouldn’t have had the opportunity. Sometimes reaching out to someone yields unexpected benefits. Said differently, this was lucky, but sometimes you make your own luck.
  2. Relationships matter. Additionally, if Tommy hadn’t known our company and trusted us, we wouldn’t have gotten the deal. Invest in relationships with people. You never know how those investments will come back around.
  3. In negotiations: think about how it looks from the other side. When you are pricing something in a negotiation, it’s natural to begin by thinking about what it is worth to you, but it’s also important to think about its value to the other party. I was too focused on the fact that the original offer was 10x what we would make if we didn’t do the deal. George saw that, even after subtracting the payment to us, Wolf was better off with this buyer than with one of the others. Paying us was actually a no brainer for them. Frankly, even with our fee, it was still their best alternative. George was right to hold out. Now, I think about this point in every negotiation.
  4. He who can destroy a thing, controls a thing. This one is from Dave (quoting legendary strategist, Paul Atreides, of course). Our leverage in the negotiation was handed to us by the eventual acquirer. When they said there would be no deal unless our contract was voided, they gave us the ability to kill the deal. That was the key fact required to understand what Wolf would do.
  5. Bring someone who’s not vested in the answer. This last one I got from my friend Al, quite a savvy negotiator himself. I told him this story, and he pointed out that I had been incredibly vested in getting any deal done because the resulting money would make our year. George, on the other hand, wasn’t emotional about the deal at all. He was able to read the other side better than I could. If you are vested in a decision, bring a “George” with you, a shrewd, disinterested party, whenever you can.

Looking back on it, this was one of the best learning experiences of my career. I still wish we’d made those “Lick the Cookie” T-shirts, though.

If you enjoyed this post, please recommend it. (Thank you!)

Until next time…


Originally published at www.linchpinpartnerships.com.