Selling My First Company – Nexus Engineering

BY Basil Peters

I started my first company, Nexus Engineering, when I was  still a grad student. A little over ten years later,  the board decided it was time to sell. The company was the second largest  manufacturer of cable TV headends in the world. The number one and number three  in our vertical were Fortune 500 companies.

Our Exit Strategy

Our exit strategy was to sell our company to a Fortune  500 company in the defense business. At that time there was a general  perception that the war business had seen its best years and that big defense  companies should be diversifying more into peaceful businesses. After a year of  hard work, we were at the term sheet stage with a Fortune 500 defense company  who wanted to enter the cable television business. But I was feeling uneasy.

Bidder Attrition and Macro Economics

About six months earlier we had three companies on the bidders  list. But, as usually happens, for one reason or another, two of the three had  dropped off. We really only had one interested potential buyer.

Time was not on our side  –  after being cash flow positive for  almost a decade we had been hit hard by the junk bond credit crisis that  started in mid 1990. Almost all of our best customers were financed by junk  bonds, many minted by Michael Milken himself. When the Fed decided to terminate  the junk bond business to prevent the real estate market from blowing up, all of our  customers in North America, and Europe, suddenly stopped buying at the same time.

A hostile takeover attempt from inside – our VC

To make matters worse, we had a venture capital shareholder,  and board member, working aggressively from the inside on a hostile takeover of  the company.

We had a layer of subordinated debt in our capital structure. When the junk bond crisis hit, we were offside on some of the covenants. Luckily, I had developed a friendly relationship with our lender. He called me one day to warn me that one of my directors was trying to buy our subdebt from them. That was all he would say, but it saved me.

I may have figured it out anyway, because my VC director, and his wife, had suddenly started to wine and dine my other directors. They even entertained one of my original investors who was a gentleman farmer and who this VC once described as about as “useful as a cabbage” as a board member.

I knew that if my last interested buyer got sidetracked, or even  delayed, I was dead. All of the value in my shares, my founding partners’ shares and  my angel investors’ shares would be wiped out by my VC investor.

An improved exit strategy

I went to my directors (other than the VC) and asked them  for advice. One of my most experienced directors asked me what we had done with our  major competitor. His question surprised me. I explained that we had discussed  this and agreed not to approach them because we were terrified that they would  use the information to take advantage of us in the marketplace at the worst  possible time – as we were trying to complete out exit transaction.

My  experienced director carefully explained the shortcomings in that strategy. He went on to suggest  we pay a specific third party,  who did business with our competitor, to ‘leak’ to them that our company was “in  play” (about to be acquired). I learned a few days later that this ‘leak’ was  going to cost us a five digit amount. I thought it was terribly expensive and  incredibly risky. My director bought me another beer and explained how big  companies think and how companies get sold.

His strategy worked brilliantly. Our biggest competitor  ‘heard’ that one of their most aggressive Fortune 500 competitors was about to  buy the second biggest company in the most strategic part of their business.  They came thundering in and ‘scooped’ our company from their competitor.

A very close call – ‘stuff’ happens

What they didn’t know, and I have never written about before,  is that our last defense bidder had gone quiet just a month after our big  competitor came roaring in to make us an offer. If I had not taken the advice of my  experienced director, and developed multiple bidders, all of the founders and angels would have been wiped out by our VC.

The Most Valuable Lesson – a 50% price increase is often possible

At the time, I thought the most valuable lesson in that  experience is to always have at least two or three active bidders. That might  have been the most important lesson, but it wasn’t the most valuable one.

The most valuable lesson was that our major competitor paid about 50% more than  what the big defense company was offering. At the time, I thought that was a  fluke.

But, after seeing the same 50% increase in selling price  over and over again, I came to appreciate that it was not a fluke, but  something that can happen, and should happen, most of the time when companies  are sold.