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Mike's often irreverent, thought-provoking analysis of the industry.

So, Whom Should We Have Rooted For?

Who would be better -- or worse -- for Michaels, Bain or KKR?

By Mike Hartnett (July 3, 2005)

The two consortia who were bidding for Michaels each contain a company with a so-so history in our industry. In the 90's Bain Capital bought Tulip, the leading fabric paint company at the peak of the wearable art trend. Many of us at the time thought the company had paid way too much: $100 million. A few years later as fabric paint declined, Bain sold Tulip to Duncan, reportedly for a mere fraction of what it had paid.

Kohlberg, Kravitz Roberts (KKR) started Primedia which bought Craftrends, Creating Keepsakes, Sew News, and a host of other magazines in and out of our industry. The company went public about nine years ago at approximately $11 per share and the stock reached a high of about $35 in early 2000. One of their acquisitions, About.com ,cost hundreds of millions of dollars and Primedia bought it about 20 minutes before the dot.com boom collapsed. Today the stock is trading under $2 a share.

(I was Associate Publisher/Editor of Craftrends when it was sold to Primedia. I tried working for Primedia for a couple of years but became disgusted with the way the hotshots in New York treated employees. I quit and started CLN.)

Now KKR and Bain were bidding for Michaels. Some retailers would like to see Michaels falter; some vendors need Michaels to succeed in order for them to stay in business. So, whom should people on both sides of the question root for?

I asked a leading mergers & acquisitions firm who subscribes to CLN. He has extensive experience in our industry and with investment firms. Because he's currently involved with deals affecting our industry, he asked that his name be withheld. Here's his answer:

"That's a tough question. These private equity firms have become so big that it's hard to generalize about which one may be better than the other. I don't know any of them well enough to know how they differ in terms of 1) whether they take a "hands-on" or "hands-off" approach to managing their portfolio companies; 2) whether they can add strategic value (e.g. planning, recruiting, strategic alliances, acquisitions) in addition to capital; or 3) whether they tend to focus on short-term cash generation or long-term growth, etc. An argument can be made that, rather than only comparing firms, it may be just as relevant to compare the transaction teams at each firm to determine their approaches and track records.

"I don't know the history of Tulip, but no amount of capital can force customers to buy your product. If consumer demand for fabric painting had peaked and begun a rapid decline, there probably was not much that Bain could do to stop the bleeding. You might have a valid argument that they bet on the wrong product sector at the wrong time (and possibly the wrong management team), but I suspect that Bain did everything they could from a reasonable business perspective to try to fix the company before selling it. At some point, however, it's better to take your losses and move on to the next one.

"I don't know the history of Primedia either, but it's important to keep in mind that private equity groups are generally not involved in the detailed day-to-day decision-making at their portfolio companies. The partners of the firm usually function more as a board of directors focused on hiring and overseeing senior management, helping set a company's overall strategic direction, M&A activities, capital raising, etc. If there were management problems at Primedia, perhaps that is the reason the former management team is no longer at the company.

"I'm not suggesting that private equity firms don't make mistakes, but rather that they usually focus on the 'big picture.' If a company's management makes a mistake, the private equity firm's response will vary depending on their knowledge of the mistake, the magnitude of the mistake, their relationship with and confidence in the management team, the size of the company relative to the firm's total portfolio, and many other factors.

"I don't know if that helps but it may provide another framework for thinking about your question."

(Note: to read previous Business-Wise columns, click on the titles in the right-hand column. To comment on this or any other industry issue, email CLN at mike@clnonline.com.)

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