Jim Freedman and his partners have been here before.
"We call this Act Three," he told me one day recently from the Westside high-rise office of Intrepid Investment Bankers, his new firm devoted to mergers and acquisitions in the regional middle market (think companies with $20 million to $200 million in sales).
The first act was Barrington Associates, which Freedman, 58, started in 1982, four years after obtaining his MBA from UCLA's Anderson School of Management. Barrington addressed the same middle market, which was then served by a clutch of small local investment banks filling the vacuum left by big national institutions with expensive overhead, firms whose radar screens didn't aim that low.
FOR THE RECORD:
In an earlier online version of this article, the subheadline erred in stating that clients of Barrington Associates had been left in the lurch after the firm's 2006 acquisition by Wells Fargo.
W. Michael Rosenberg, 51, joined Freedman in 1985 and Ed Bagdasarian, 46, signed on in 1989. In the years that followed, they and Freedman built Barrington into a premier M&A advisor for midsize entrepreneurial companies. They expanded nationwide and, in 2004, into the Far East with a Shanghai office.
The firm's signature deal in that era was the 2002 sale of Herbalife International to two private equity firms for nearly $700 million.
Barrington jumped up another level in 2006, when it agreed to be acquired by Wells Fargo & Co. That was Act Two. Wells "made a compelling case," Freedman says. "They were a huge lender to the middle market. They could feed us a tremendous amount of business."
The flow went in the opposite direction too, for Barrington could introduce its clients to Wells Fargo's private banking services. "We thought this might be a really interesting way for us to expand," Freedman says.
For a couple of years the arrangement worked well. Barrington doubled its revenue in its first year with Wells while retaining its independent identity. Then came 2008, and Wells Fargo joined with Wachovia Corp. in the largest U.S. bank merger ever, creating a $1.3-trillion behemoth.
Wachovia brought its own huge securities and investment banking operation to the merger, which meant that Barrington's days as an independent shop were numbered. Its clients were again falling off the lower edge of a radar screen tuned to much bigger companies.
"It was very difficult for us to understand their world, and difficult for them to understand our world," Freedman says. In May 2010 he, Rosenberg and Bagdasarian decided to strike out on their own again. When they had joined Wells, Barrington had 50 bankers on its staff; they left with eight or so, and they've since built back up to 15.
The idea, Rosenberg says, is "to get back to our roots of helping entrepreneurs get private capital."
Intrepid's landscape is not the investment banking market of legend and glamour. Its clients, as were those of Barrington, are typically small entrepreneurs or owners of family businesses who spent their working lives building up family companies, sometimes as the second or third generation.
They're looking for what bankers call "liquidity events" — selling their firms in preparation for retirement, or looking for private equity investors or partners to provide them with capital to survive in an increasingly competitive niche industry. They're not candidates for venture firms or initial public offerings. For some, the very act of seeking capital is a novel experience.
What Intrepid knows is that they're thick on the ground in Southern California — firms in healthcare services, the food and beverage industry, consumer products, specialty manufacturing. They're the infantry of the U.S. economy.
Take Nelson Nameplate Co., the client in Intrepid's first completed deal. With $20 million in annual sales and 200 employees in Atwater Village, Nelson makes (as its name implies) metal and plastic nametags and labels for equipment or machinery manufactured by others. That's half its business; the other half is manufacturing membrane switches, the sealed push buttons you might find on the keypad of a credit card-activated gas pump.
Nelson's owners, Tom Cassutt and Dave Lazier, were looking for an exit after owning and operating the company since 1984. They had a large portfolio of investments in other companies and were devoting most of their attention to running two manufacturing firms, in Fontana and Irvine.
"We decided we were personally overextended," Cassutt says. Nelson had stopped growing and plainly needed full-time leadership.
Intrepid's role was not only to find candidates to take over Nelson, but prepare the investment book for them and perform due diligence on the bidders. And there was one more important function — hand-holding.
"Selling a business can be an emotional thing when you've owned it for 27 years," Cassutt says. "They helped us keep our emotional balance."
In April, Nelson announced its majority sale to the Detroit-based private equity firm Superior Capital Partners (Lazier and Cassutt retained a minority interest).
Intrepid's principals have long earned high marks from clients and others on the local M&A scene for their experience and attention to detail — their "execution skills," in the words of Eric Bacon, co-head of the Cleveland private equity firm Linsalata Capital Partners, which worked with them on its acquisition last year of a majority stake in Cypress-based Manhattan Beachwear.
That's what appealed to Eileen Goodis in 2005 when she decided to sell Home Pharmacy of California, her home healthcare business.
Burbank-based Home Pharmacy's 150 employees delivered infusion medications for patients needing IV nutrition, pain management or chemotherapy at home, and oversaw the necessary nursing services, but it had become clear that it would need to grow to national scale to obtain contracts from health plans in the increasingly consolidated health insurance industry.
She chose Barrington without interviewing any other firm to help her find a buyer, she says. "I had so many colleagues and friends who had used them and were happy. Their reputation spoke a lot." Barrington assisted on Home Pharmacy's eventual sale to Walgreen Co., which was expanding from retailing into healthcare services.
The middle-market M&A landscape today looks a lot as it did in the 1990s, when Barrington was experiencing strong growth. "There had been a bad recession then too," says Rosenberg, and — fingers crossed — a long period of recovery may lie ahead. Commercial banks are lending aggressively to support private equity deals, a sign that the credit crunch of 2008 may finally have passed, at least in this sector.
That's not to say that Intrepid isn't facing new challenges.
"The landscape is one of more competition," says Lawrence M. Braun, a leading Los Angeles M&A attorney who has worked with Freedman and his team on numerous deals, including Nelson Nameplate. "The clientele has become more sophisticated, and they're looking for bankers who specialize in their industries."
Still, Freedman and his partners are looking for a reprise. "Five years from now," he says, "you may see something again that resembles Barrington in size and reputation."
Michael Hiltzik's column appears Sundays and Wednesdays. Reach him at firstname.lastname@example.org
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