Turning Owners into Partners

We closed a deal last week that we had been working on for 5-6 months and many peope have asked how we found a good company to invest in during these difficult times when no owners want to be sellers and few high quality opportunities exist.

To begin with, this environoment should not be a surprise to anyone in the deal business, particularly given that the financial system locked up in September 2008 and has yet to recover despite some promising signs. At Navigation Capital, therefore, when we were doing our Plan for 2009 we decided that we would have to identify categories that we found attractive and actively pursue an investment in them. This represented a material change in strategy from the generally opportunistic approach that equity investors take of trying to identify companies that are available for sale, either through the investment banker community or through personal contacts. Instead of sellers, we decided to find partners.

To do this we identified 4 catagories where we would look for attactive investment opportunities: Interactive Media, Intelligent Infrastructure, Government Contracting, and Commercial Banking. We have signed NDA's or LOI's in all four and expect to close several more this year. We have also added a fifth category recently, green contract manufacturing.

To give you a sense of our thought processes and approach, let's use Interactive Media as an example, since this transaction will be announced this week. First, why IM? By observing our own portfolio companies dissatisfaction with their ability to be sure that their advertising spend was hitting the demographic that they wanted to attract and their frustration with their ability to measure their effectiveness in doing so, and by hearing the same thing from friends that run companies, we concluded that traditional advertising agencies were at risk of losing their customers to digital solutions. Not today, but over time.

Second, we looked at the data. Advertising spend was way down in every segment but, importantly, IM was not down as much. Increasing share in a declining market, but one that should rebound with the overall economy. Secular trend concealed by a short term cycle!

Third, we looked at the industry. A small number of truly significant big companies whose revenues were plummeting, and a large number of small companies whose revenues were under stress, but who were picking up market share. Potential future buyers if we could put a meaningful company together that was big enough to appeal to the large companies when their revenues recovered only to realize that they had lost market share. Finally, we needed a company. But at least we were focused and had the key dimensions. Today, little is secret, so compiling lists and identifying key executives only required the application of time and intelligence to a task (i.e., work).

But why would anyone take in capital today when valuations are low and operating performance is hard? We have investments in about 15 companies and none of them are for sale, so why would we expect another business owner to come to any different conclusion than we have? We don't. In thinking about our own situation we realized however that our ambitious and aggressive companies and their CEO's had changed their perspective at the end of last year from "hunkering down" and "getting through" difficult times to capitalizing on the opportunity to expand their business through acquisition of weakened competitors and more rapid organic growth They were coming to us for the necessary investment capital, so why wouldn't other owners who do not have immediate access to expansion capital not have the same need? They do, and long story short(er), we needed to find one in the IM space with the vision to see that need , the ability to plan the work and work the plan, and the sophistication to realize that a smaller piece of a much bigger pie is not only worth more but it is also more fun to bake and ultimately tastes better. By providing the necessary growth capital we become their partner.