Because so many sellers expect a high level of confidentiality from us post-sale we endeavor to zealously protect the details of actual transactions. Accordingly, and as will hopefully become painfully obvious, these fact patterns are hypothetical and not intended to describe any particular company or transaction. Instead, they should be regarded as a broad gauge of the experience and acumen of our team at large. Obviously, every transaction is different and, accordingly, the Catalyst approach differs on a case-by-case basis as we encounter different situations, personalities and environments. We pride ourselves on our flexibility and no "template" exists for the approach we might take to a given transaction.

Case Study #1 relays the travails of the fictional company "LeafDataCo," a firm specializing in providing high-quality market research for the dynamic and exciting leaf blower sector.

Case Study #2 presents the harrowing tale of "NegReturnCo," a fictional manufacturer of artificial pepper.

Case Study #3 (forthcoming) sketches a narrative surrounding the nonexistent "LegacyCo," a yarn about an old-world Birchwood Jam producer.

The firm is named, of course, for its founder, Phillip Leafdata, who retired in 2003 following the IPO of the firm on a national exchange. Contrary to popular opinion, Jessica Dataco, the firm's new President, is not related to the founder in any way, nor does she hold a significant equity interest in the firm.

The firm is located in a small town environment and is a major employer in the region. The ebb and flow of the economic tides have a direct impact on the local perception of LeafDataCo as an employer and good corporate citizen.

The leaf blower market is a broad and fragmented field composed of a variety of consumers of market research data ranging from highly specific and customized reports to more general and static market indices. Five major providers of leaf blower market research compete with LeafDataCo.

Concerned by the high internal costs of producing custom market research and the difficulty in creating recurring revenue streams from such products, LeafDataCo elects in 2005 to shift its strategy to focus on the more commoditized and lower production cost, general market indices segment of the business. Now a public company, the overall margins of the firm, driven primarily by the general market research business, are being dragged down by the custom market research unit's higher costs and putting pressure on LeafDataCo's stock price. This necessarily entails disposing of the firm's custom leaf blower market research arm, a unit composed of some 250 employees, some with decade long histories with the firm.

The unit itself, primarily run as an internal resource for LeafDataCo, has never been extensively marketed to customers, lacks the consummate organic marketing expertise, is not a stand-alone unit, and has never been run on anything other than a "break even" structure internally. LeafDataCo, now focused on the much more lucrative commodity research business, does not, therefore, have the time or internal resources to develop marketing expertise and strategy for the unit.

Any consideration of a sale of the custom research unit is torpedoed by concerns from the Board of Directors of LeafDataCo that the highly proprietary nature of the custom research unit's products make tendering it to a third party or permitting one of the firm's competitors to acquire the unit a non-starter. Accordingly, the Board begins discussions with respect to closing the unit entirely. Key in this decision is the concern by the Board that the auction process alone would risk the leakage of critical business data to competitors.

Several directors point out that, given the strict non-compete clauses in key employee agreements precluding employees of the custom market research unit from seeking work in the industry if they are laid off, downsizing will be political dynamite for the firm. Waiving these clauses, however, raises the same risk of data leakage as a sale. Even in the face of these concerns, however, LeafDataCo's bankers point out that the economic costs of closing are far outweighed by the benefits increased margins will have on the firm's stock price.

Having worked before with Catalyst, however, one of LeafDataCo's outside counsels suggests that a discussion with Catalyst might be beneficial in exploring non-conventional options. Jessica Dataco is dispatched to meet with Catalyst and report back to the Board on her findings.

Faced with the situation, Catalyst suggests several alternatives during the initial meeting with Ms. Dataco, the most attractive of which entails the sale of the custom research unit to Catalyst with a multi-year service agreement back to LeafDataCo providing continued access to high-quality custom market research.

Because Catalyst is beholden to no traditional Limited Partner or Investment Committee things progress quickly. Catalyst calls an emergency partnership meeting the same day as the meeting with Ms. Dataco and within 48 hours, Catalyst has obtained internal authorization for the investment and develops a general structure authorized by the partnership that permits the existing custom research employees to maintain their current benefits package with minimal changes, participate in a new equity sharing plan in the new entity, and align employee and new management incentives with the new unit.

Catalyst also develops a marketing plan to grow sales and marketing resources internally in the new entity and put it on self-sustainable footing quickly. This is coupled with a concrete investment plan to develop back office and support functions to permit the firm to quickly evolve into a stand-alone entity.

Certain accounting treatments (namely FIN 46) which might have required consolidated reporting if the new spin-off looked like a "special purpose entity" are addressed in this fashion.

Initial personnel due diligence into the customer market research group reveals both that minimal layoffs would be required and that a number of individuals possess management potential, but that a significant internal development effort will be required to realize these potentials.

During the early due diligence process, Catalyst spends significant time with the employees eliciting their hopes and desires as well as providing a window into what life as an independent Catalyst subsidiary is like. Catalyst takes pains to convey the importance of employee satisfaction and empowerment within the Catalyst portfolio. Employees are reminded that while they were once just a small unit of a public company, under a Catalyst umbrella they will suddenly be "the center of the world" again. The proposed equity and/or profit sharing plans, linked to firm performance, help improve morale and internal support for the transaction. Before long, the vicious rumors about a "sale" and "layoffs" are mostly under control.

Finally, Catalyst prepares a rapid transaction schedule, anticipating an 11 week closing timetable and the appointment of Catalyst Operating Executives as the interim senior management team for the new entity.

This solution presents LeafDataCo with several distinct advantages over the other alternatives originally considered by the Board:

1. The cost center of the custom research group is removed from the books of LeafDataCo entirely and cleanly.
2. Access to the core product set, a popular offering despite its low margins, is maintained for LeafDataCo, preventing customer alienation or the loss of "one stop shop" market research status for LeafDataCo.
3. A quick disposition, allowing the next or following quarterly report to carry the sale announcement thereby avoiding a protracted "limbo" period and all the attendant distractions such a period creates.
4. LeafDataCo will not have to endure the reputational blow of laying off loyal employees, who will instead be able to take direct part in developing their efforts into a new product line under Catalyst's guidance. A press release announcing the much more positively received "zero-layoff" sale and continued partnership of the two firms is prepared.
5. LeafDataCo will book the transaction as a sale and realize a variety of monetary gains.

Catalyst is given the go-ahead and within 9 weeks (2 weeks ahead of schedule) the transaction is consummated.

As with all transactions we contemplate, the three key features of Catalyst sponsored transactions provide the seller with distinct benefits in this case:

Speed: In this case Catalyst was able to develop a structure, perform due diligence and close a transaction in a quick 9 weeks. The result was a rapid disposition for the unit and significant benefits for the seller.

Certainty: Both the seller and the unit employees were able to move quickly and decisively to commit to a course of action owing to the direct and consistent plan developed by the Catalyst team.

Integrity: Because Catalyst concentrates on the interests of the many stakeholders in a transaction, and because we "say what we mean and do what we say," both the seller and the unit employees were able to proceed with confidence in completing a transaction where Catalyst was able to act as a "white knight."

Back to top.

NegReturnCo is a quality manufacturer of artificial, zero-sneeze-causing black pepper marketed in North America as "Soft'n'Pepper."

"Soft'n'Pepper" was originally commercialized from discoveries made at the Sonnenblick-Frazier Institute for Edible Research, a scientific pillar of modern food development research aptly named for its founder, the famous professor and Chairman of NegReturnCo, Dr. Robert Q. Institute. The Institute is responsible for a long line of highly successful food breakthroughs including "Garlifresh," (the "Minty Fresh Garlic Salt"), "Hotsicles," (the "Microwaveable Fruit Treat"), and "Broc Pop," (the "Broccoli Flavored Soda,"). The Institute has carved out a small empire for itself within the food and beverage industry.

NegReturnCo, named for Dr. Institute's dearly departed grandmother, Roberta E. Turn, is the commercial arm of this empire and holds a license from the Institute permitting it to exploit all commercial interests in Soft'n'Pepper (and the other Institute products) in return for a 3% license on all worldwide sales of Soft'n'Pepper (a tidy sum) that are, in turn, devoted to furthering the Institute's continuing food research.

Dr. Institute arrived at this structure (a non-profit Institute with a separate commercial marketing and distribution organization) because he intended to devote a portion of all proceeds to food research for all humankind. This, along with the Institute's charity work in Africa and Asia have earned both Dr. Institute and the Institute itself no small measure of notoriety and respect in the world community. The Institute refuses to comment on the persistent rumors that Dr. Institute might be up for a Nobel Prize.

Four months ago, a graduate student at the University of Western Carolina made a startling discovery. One of the important additives in Soft'n'Pepper seems to have an unusually high correlation with severe dandruff in laboratory mice.

Published in the International Journal of Disappointing Scientific Results, the finding shocked the food industry and immediately caused a serious crisis in NegReturnCo. Within days NegReturnCo is hounded by the media, it's headquarters is besieged by protestors and calls for congressional hearings grow louder and louder. Within 24 hours of the article's publication, a website called "I Hate NegReturnCo dot com" springs up.

In a stroke of bad luck for NegReturnCo, the little known, but soon to be famous, Katherine Clu-Fischer, a reporter for the local newspaper, the "Biased Observer Post," catches a Junior Vice President for NegReturnCo off guard with a 3 a.m. phone call. Convinced he is talking to his ex-girlfriend, known for her frequent late night calls, the Vice President admits, "We've all been scratching our heads over this." The next morning's headline reads: "Did NegReturnCo know?: NegReturnCo executive admits widespread scalp itching among senior executives at NegReturnCo."

Desperate to come to a resolution, the Board of Directors of NegReturnCo calls an emergency meeting. There is some delay as two of the more prominent members have to be recalled from a critical corporate goodwill trip to the Old Course in Scotland. When they finally meet, several options are considered by the Board including immediately closing down all activities related to Soft'n'Pepper, commissioning a study of the study to disprove its results or otherwise call into question the findings of the journal article, hiring a public relations firm, issuing a general denial and stonewalling, a complete recall of Soft'n'Pepper, preemptive bankruptcy to avoid what will doubtless be a series of class actions suits against NegReturnCo, and an all expenses paid vacation in Vegas for all of the members of the Board. (This last suggestion earns only blank stares from the other members).

While the Board is busily considering how to respond to the situation, Ms. Clu-Fischer has been equally busy digging into NegReturnCo's financials. She discovers that one of NegReturnCo's directors never earned his high school diploma and is also on the Board of Directors for the public corporation that manufactures "Flake No More," a popular anti-dandruff shampoo. She also discovers that the same director sold his NegReturnCo shares the day before the journal article was published and used the proceeds to buy shares in Flake No More's parent company. The resulting headline, "Fake Flocks to Flake No More," breaks all the newspaper's sales records the next morning.

Meanwhile, while waiting in the Galapagos Air departure lounge. Catalyst's Chairman, Hans Amell, happened to read Ms. Clu-Fischer's article in the Biased Observer Post. Intrigued by the company, Mr. Amell quickly called John Oldfield, Catalyst's Vice President of Business Development and directed him to contact the firm and see if Catalyst could be of help.

Mr. Oldfield contacts members of NegReturnCo's corporate development office and within 24 hours Mr. Amell, canceling his Darwin tour of the Galapagos islands, is meeting with the Board of Directors for NegReturnCo. Several critical initiatives emerge from the meeting:

1. That Catalyst would be interested either in:
   • Acquiring NegReturnCo outright
   • Taking a stake in NegReturnCo and dressing the fallen company for a for later sale, or
   • Orchestrating an "orderly wind down" of NegReturnCo's affairs
2. That immediate, direct and decisive action needs to be taken quickly to at least stabilize the situation at NegReturnCo immediately.
3. That regardless of the structure of Catalyst's involvement, serious crisis management work needs to be done. In this connection, Catalyst recommends a world-class crisis management firm, with which Catalyst maintains an active partnership, to take over the daunting task of public relations for NegReturnCo.

The Board convenes and after emerging from their conferences, asks Catalyst to present an offer for the acquisition of NegReturnCo as quickly as possible.

Together with the crisis management firm Catalyst immediately begins the dual process of stabilizing the firm and an intense investigative due diligence program. Under the agreement with the Board of NegReturnCo, Catalyst agrees to share all the results of due diligence with NegReturnCo in the event Catalyst decides not to make an acquisition.

The immediate triage of crisis management takes several forms. The initial steps include:

1. A public relations committee with experienced spokespeople is immediately appointed to avoid any more unauthorized or unmanaged communications with the outside world. Disclosures are strictly limited to particular spokespeople within the firm.
2. The many stakeholders in NegReturnCo are identified and independent channels of communication directly from the company are estlablished with them to minimize the dangers of relying on third parties and the media as information intermediaries.
3. A single point of contact is established within NegReturnCo to permit information to flow directly to the senior managment of the company from the lowest level employee to the top.
4. In order to control the spread of erronious information, several representateives are announced within the company to answer any and all questions by employees.

As the situation is stabilized, the due diligence process Catalyst undertakes serves two purposes. First, it allows Catalyst to value the firm. Second, it has the effect of creating a close investigation of the facts surrounding the firm's woes by a critical (and somewhat skeptical) third party.

In addition to the rigorous scientific due diligence that Catalyst conducts, a three-fold strategy is developed. The first level, focused on the first 30 days, involves a detailed review of NegReturnCo's financials with a particular focus on preserving as much cash flow internally as is possible for the company. Catalyst leverages its substantial change-agent experience to navigate the company through this period and identify the not-so-obvious sources of value within the firm's balance sheet and non-financial assets.

Central to Catalyst's approach to the first, critical 30 days is the philisophy that a fine balance between "buying time" and "investing for recovery" must be drawn. Catalyst prefers to avoid the quick and easy path of liquidation and cost cutting wherever possible, instead focusing on the longer-term looking strategy of keeping the firm stabilized in this early period with the needed infrastructure emerge from the crisis intact and strong. Of course, in some situatiions a recovery is simply impossible. In this unfortuante event, Catalyst's "liquidation as a last resort" strategy permits the firm to preserve a larger interest for the various stakeholders.

After the first 30 days, Catalyst expects to be able understand if a platform to build on actually exists, and if not, which assets can actually be preserved or divested.

Following this period, Catalyst has identified several key assets that can be built on. Catalyst structures a transaction to acquire NegReturnCo.

Back to top.