Deconstructing a deal

by James Menzies

ETOBICOKE, Ont. – On Oct. 23, 2012, Wheels Group announced it had acquired MSM Transportation in a major deal worth $18.6 million.
The announcement came as a surprise, in part because Mike McCarron, managing partner and the public face of MSM Transportation was just 52 years of age – seemingly too young to be considering retirement.
What was the reason for the sale? Why was the timing significant? And what was learned along the way about the arduous process of selling an established business?
For the answers to these questions and more, we caught up with McCarron for an exclusive interview.
When we spoke to McCarron, he had just assumed a new position in mergers and acquisitions with Wheels Group (a role he was mindful not to discuss with Wheels until after the sale of MSM had been
The underlying theme throughout the entire interview was the challenges involved in getting a deal done while continuing to manage the business over a course of many months. We spoke at length on the subject. The following interview should be considered a must-read for anyone looking to exit the business within the next few years.

TN: Mike, at 52 years of age, you’re a pretty young guy to be selling your business. You’ve still got some years ahead of you. Why’d you decide to sell this year? Should we be reading into the timing in any way? Are you down on the industry and where it’s headed?
McCarron: There were a bunch of factors. With MSM, we got to the point where we realized we were too big to be small, but too small to be big, which is a very difficult position to be in. We felt that in order to get the business to the level where you get true economies of scale, we were going to have to invest a lot of money into the business; a lot of money that my partner (Bob Murray) and myself didn’t feel like risking, frankly.
We decided a couple years ago to start getting ready to sell and if the right opportunity came along, we’d take it. We decided, let’s learn the process, let’s get our house ready to sell, let’s get the corporate clean-up done and let’s see what happens, because neither one of us were prepared to take the risk required to take the business to the next level. We thought maybe it was better to take our chips off the table and secure our families.
Then, as we started looking at things, we started recognizing the dynamics of the marketplace. We recognized that as much as we positioned ourselves as a hybrid transportation/third-party company, we really started positioning ourselves more as a broker, because we realized the multiplier would be higher.
Freight brokering was really a phenomenon that started when trucking deregulated. It was a bit of a gold rush in the late 70s and early 80s. They were started largely by sales guys who saw an opportunity to become self-employed in a business where normally they wouldn’t have had that opportunity before. Third-party brokering became very mainstream and it spurred a whole new network of smaller trucking companies.
But if you look at who historically started these businesses, if they were 30 years old in 1980, they’re 62 years old now. We were really concerned about what would happen 10 years down the road when all the other baby-boomers were trying to sell their businesses. We were concerned about the glut in the market and what that would do to our EBITDA and to our earnings and what the multipliers would be and who would buy all these third parties?
I think the other factor too, is we were getting really tired. My partner Bob really ran the business on a day-to-day basis and he was the anchor who kept it all together. We were both getting really tired.
I know personally, I was extremely bored. And business was not as much fun as it used to be. It seems that in the trucking industry, when the bottom fell out, a lot of the fun went out, too. Everything was a day-to-day battle. Every time you turned your head there was some other factor that was out of your control that would affect your bottom line.
We also had a situation whereby it appeared the M&A market was pretty strong. We started to get some more calls. Certainly, I know the investment people we talked to were sitting on a lot of money. And say what you want about this industry, prospects for transportation and logistics over the next 15-20 years are actually very good.
If you put all those factors together, we felt it was the right time.
This time last year, we started trying to find out what would be the right fit. We wanted to really find a company that would be a fit, that would allow us to get our money off the table, that would take care of the people that worked for us – that was very important, that people would get taken care of – and that would allow both Bob and myself to leave, maybe not the industry, but leave MSM.

TN: So, you were quietly preparing the business for a sale and at the same time, you’re getting more calls from interested parties. Are these cold calls from potential suitors?
McCarron: We always got calls, but when you talk about suitors, there are the investment suitors and the strategic suitors. We felt the problem with the pure investment suitors, the institutional investors, is that their game is very simple. The people with the money want to come in, rape and pillage your business, cut costs and get in and out within five years.
Take the situation MSM had; we had a lot of long-term employees. We had a very stable culture. Sometimes when you have long-term employees, you look at the balance sheet and the secretary who started making $20,000 25 years ago and got a 3% raise every year, they’re making money that looks on paper like you could get someone else to do their job for a lot cheaper.
We were really concerned, not only with the type of dollar we were going to get from just a money buyer, but concerned with what they were going to do with our people. So, we were looking for some strategic opportunities. I can’t protect the staff forever, but we were looking for a situation that at least would give them a fighting chance to prove their worth and show that they can add value to the bottom line.

TN: How did you identify Wheels Group as a good fit?
McCarron: Wheels and MSM have a long history together. We were two of the first transportation companies to become one of the 50 Best Managed Companies about 17 years ago. We were both major customers of the same software company, so we worked a lot with them developing programs over the years.
We’ve done a lot of business over the years. And chairman and CEO Doug Tozer is not only a neighbour of mine, but we grew up in the same neighbourhood, so he’s been a good community friend for over 30 years.

TN: Did having that pre-existing relationship make the process any easier, or perhaps even more difficult?
McCarron: How this all started was, I was having coffee – something I almost never do – with a friend at the local coffee shop and Doug happened to walk by at 10 on a Saturday morning. He said ‘Mike, can you give me a call after your coffee?’ I gave him a call as soon as I got in the car and spent the next two hours driving around, talking to him on the phone.
Because of my relationship with Doug, I didn’t get actively involved in the negotiations until near the end, because I really felt it was best to stay out of it. It became evident pretty early on that there were a lot of cultural similarities, a lot of synergies from the standpoint of, we had skills and expertise they didn’t have and conversely, they had some we didn’t have. They had just turned public in what was a third-party consolidation platform and it was just a really good fit.
It was almost like buying a house. Once you find an area you like, when you’re looking at houses and the right one is there, you know it’s the right one and you buy it. I knew early in the process that Wheels was a good fit and the challenge was to work out a deal that would work for Doug and the shareholders of the company and satisfy some of the requirements Bob and myself had. It was still a very long process. It took almost nine months.

TN: Does having a partner in the business complicate the sales process, or were your objectives always aligned?
McCarron: My partner and myself, about three years ago, had some disagreements on the way the business direction should go at MSM. But, it was a respectful disagreement.
When business went bad, it needed the type of leadership Bob could bring. He ran the ship on a daily basis. We didn’t necessarily agree on the long-term direction of the company, but we were not foolish enough to do it in public or allow it to affect our ability to run the business. I was proud of the way we handled things. I think with a lot of partnerships, egos would’ve gotten involved.
James, we met each other 22 years ago and didn’t know each other well at all, and due to circumstances we ended up becoming partners. A 22-year run was a good run. The fact we disagreed on a few things didn’t make it a failure; it was a success.
When it came time to sell the business, Bob was in charge of that process. I had a lot of say, because we were both majority shareholders. We were both in tune with where we wanted to take this thing, we worked hard to get the business ready to sell and we both agreed a strategic partner was going to bring us the best return.

TN: So, once you identified Wheels as a strategic fit, what came next? Did you sit down in a boardroom like this one and hammer out a deal?
McCarron: The first thing we did was hired an investment banker, who helped us maximize the value. They can be very expensive, but I think of an investment banker almost as an agent for a hockey player. People say ‘Why does a hockey player need an agent?’
The problem with negotiations is they can get difficult, and they can get personal. You have to be very careful because when it does get personal, if you are involved in the negotiations you can sometimes take it too personally and set the negotiations off. We felt that working with an investment banker, their experience was great, they helped us work through the legal jargon – in particular dealing with a public company – and they really helped us get to the finish line.

TN: Were you completely hands-off during the early stages of negotiations, allowing your investment banker to represent you as a hockey agent would, or were you involved at every step along the way?
McCarron: There was a ton of direct contact because when you’re talking to a public company, there is a fiduciary responsibility that no stone can go unturned. When no stone goes unturned, there are a lot of questions, questions we didn’t always have the answers to, at least initially. It’s a really complicated process.
What people don’t understand is that the due diligence isn’t only on the side of the acquirer. We did a lot of due diligence to determine if it was the right fit for us.
Part of the deal was stock, so we had to make sure the paper we’re getting is good paper.
The part I think everyone forgets, James, is that while this is going on, you still have to protect your bottom line. As much as we began discussions in January of last year and closed in October, the closing is based on the numbers at that time. So, now you have your financial team and your administrative team doing reports, answering questions and going to meetings, but they still need to be managing the house. People tend to forget about that. The day someone knocks on your door is not the day you sell the business. It’s based on your financial statements, so every time you have a bad month – or conversely, a good month – it’s affecting the numbers. The numbers are based on the snapshot that day, but they take a brand new snapshot the day they close the deal.

TN: What was the biggest surprise about the whole process?
McCarron: Just how complex and difficult it is to get a deal done. The amount of detail, the amount of tension, the amount of planning, the amount of costs incurred, given the complexity of the deal.
The other thing that surprised me was how difficult it is to have your management team focused on trying to get a deal done, while also focusing on trying to keep the numbers up on a day-to-day basis.

TN: Throughout this entire process, how important was it to keep things quiet and how did you accomplish that?
McCarron: It’s very important. We heard almost no rumours on the street. We gave it a code name; we called it Project Mango.
The people who worked on it all signed confidentiality agreements. What I found is that, where you start getting rumours is when the meetings start happening. Once a week, someone from Wheels was at our offices and people start seeing lawyers and accountants come in. People start sensing something is going on.
When we started actually hearing rumours in the industry was when we had to involve outside people. For example, when we went to someone to evaluate all the equipment. Once you start involving third parties, it’s hard to keep a lid on it.
I wasn’t massively concerned about rumours. We wanted to keep it confidential in case it didn’t go down, but we weren’t playing four or five parties against one another. We knew Wheels was the best strategic fit, it was just a question of getting the deal done.

TN: I didn’t hear anything, if that means anything.
McCarron: And you would, too. Where you normally hear things is from the suppliers. If people say so-and-so is having trouble, and it’s from a competing trucking company, I don’t put any credence in that. But where rumours in this business are credible is when they’re coming from the supplier side, for example, so-and-so is trying to renegotiate leases on their trailers.

TN: When the deal was completed, how did you communicate it?
McCarron: We had a lot of direction from Wheels on that. Because Wheels is a public company, we had to be very careful about how we announced it. Basically, at the same time, after markets closed in Toronto and in the US, we had staff meetings and a press release was issued by Wheels.

TN: I imagine this was a real shock for your employees. How do you soften the blow?
McCarron: You don’t. It’s difficult. People are smart and they realize that jobs might get rationalized and things get condensed. So, rightly so, people are very nervous any time a business is sold. We did everything we could to protect everyone’s job, but the reality is that Wheels Group has to do what’s best for their business and their shareholders.
We can’t control that. What I said to our employees is that the most important thing is that if a company is looking to rationalize positions, they’re going to take the best employee, the person who works the hardest and the person who’s producing. They’re going to pick the best, so the key is to work hard like you have been, contribute, do your job and it’ll work out no matter where you go. It’s difficult, but I say this to people all the time: Unless your name is on the front of the building, you have no say.

TN: On a personal level, you started MSM at a young age and have spent most of your professional life owning your business. Now, you’ve cashed in, you’ve got money in the bank and you’re going to work for someone else. How difficult do you expect this transition to be?
McCarron: I just started this week. I’m only 52 years old. Frankly, I’m the type of person that with all the free time and a little bit of cash in the bank, it can be a dangerous if you’re not careful, because I’d get bored out of my mind.
I don’t have to work anymore. I’ve been pretty frugal with my finances, money was never that important to me and nothing is going to change in my life. Five years from now, there won’t be a Maserati in my driveway. This wasn’t about becoming filthy rich and changing my lifestyle, the biggest thing for me was securing my family.
The advice I kept getting was the biggest mistake you could make would be to head to the hills for four or five years, get bored out of your mind, then come back and nobody remembers who you are.

TN: Is this a newly created position?
McCarron: Yes, it is with the Wheels M&A team.

TN: Should we read into that then, that Wheels is looking to acquire more companies and continuing to grow?
McCarron: Wheels went public with a plan that they would like to grow their business organically and through mergers and acquisitions. A big part of buying MSM was consolidating the third-party space. Like Doug and his management team, I think there will be a tremendous opportunity. What I believe is, when you look at the demographics of the third-party business, that all these freight brokerage entrepreneurs who were getting to be 55, 60-plus years old, are going to want to retire at the same time. The question is, who’s going to buy them?
I want to investigate that market to take advantage of the demographics in the industry. Look at the freight brokerage business; there are no contracts, it’s all goodwill, it’s all handshake deals and it’s all transactional.
You don’t pay for it and if you look at freight brokers, that’s all they have.
Also, I think a lot of people are tired; they’re worn out.
If you look at things historically, when business goes bad, the smaller, weaker third parties tend to get gobbled up because they get rationalized out of the supply chain.
My goal here at Wheels, working with the rest of the management team, is to build programs that allow us to consolidate a lot of these Canadian and American third parties when it comes time.
It’s a pure probability model. I can tell you who’s going to retire, why and how, I just can’t tell you when. So part of this is creating some services for the owner/operator, single sales rep that’s looking to get out and even for the larger freight brokerages. I think what they’re going to find, like we found, is that as this industry continues to age, it’s going to be far more difficult to get out, because there’s going to be a glut in the market and there aren’t going to be a lot of buyers.

TN: What can an owner that’s looking to sell do to make their company more attractive to a buyer like Wheels Group?
McCarron: First and foremost, if you want to get out in the next five years, you have to be in that process now. It’s incredible, the things that have to get done that don’t get done on a normal basis.
At MSM, we had a number of companies. Even cleaning up the minutes books and getting records up to date was difficult, and we were a very well run company.
At MSM, we were confident that we had no skeletons in the closet. It was just the way we ran the business, with integrity and full disclosure. People that have skeletons in the closet: they’re going to find them. You can’t hide. The due diligence is so deep.
The first process is, you have to clean up past mistakes. Get the business ready, clean up the corporate minutes books, be ready for when that person comes to the door, so that you can begin the process, because if you have to do the clean-up then, the first perception the buyers will have of you is not a good one and they can walk at any time.
I really underestimated how much work goes into getting the business ready. We did all of this beforehand. By the time Doug Tozer banged on our door, most of this was already done. We even put all our companies together and consolidated their statements ahead of time, knowing nobody was going to buy seven companies.

TN: Based on your observations of this industry, do you think most owners have developed an adequate exit strategy or do you think it will be a mad scramble to get out?
McCarron: I wouldn’t say it will be a mad scramble. I don’t know if this is a product of our industry, I think it’s more a product of our age. But everyone is tired. It’s been a tough go and it’s going to be tough getting the business to where it used to be. A lot of the perks are gone and I just think people want to slow down. They’re starting to think about an exit strategy and if they plan that properly, they’ll be fine and their businesses will sell. But it’s not going to be as easy as going to the local ReMax agency and putting a shingle on the door.
I definitely believe that the 50-plus generation is starting to think about slowing down. My best guess is that on the freight brokerage side, that businesses got badly beaten up in 08-09, the ones that survived realized their best play may be to roll on with a larger player, one that can compete more aggressively within the third-party market.
People start looking at the amount of work it’s going to take to get it back to where it used to be. We look forward to taking what I learned about the M&A process implemented at Wheels and to start engaging the process.  n

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