“Literally, the first three sentences out of my mouth when I introduced myself to the 400 people gathered were: ‘My name is John French. You may have heard of me in the past. My mission here is to sell this company.’”
That was September of 2009 when John French was freshly installed as CEO of Cygnus, which had just emerged from bankruptcy protection. But let’s back up a little bit.
A year earlier, when French was stepping down as CEO of Penton, he was actually preparing to buy Cygnus with help from a private equity firm that’s been known to buy big, platform B2B publishers—French declined to say which firm. But a deal was not in the cards. Cygnus owner and private equity firm Abry Partners declined the offer and not long after, the market collapsed. “It was the biggest break of our career,” says French. “We would have been left holding an investment that was way overvalued.”
At the time, sources estimated Abry was seeking $200 million to $240 million.
After that narrow miss, French opted for some time off to spend with his family.
As it turned out, his destiny was tied to Cygnus after all. Abry was preparing to walk away from Cygnus, essentially leaving the keys to the car on GE Capital’s desk. Out of a syndicate of 23 lenders, GE had the biggest stake. And that’s when French was brought back in.
GE hired him a few months later to consult during negotiations with creditors to reduce debt from $180 million to $60 million. One hundred percent of creditor consent was needed to avoid bankruptcy, but a single holdout, an investor with 2.5 percent of the company who didn’t want to take a bath on his cut, triggered it.
French’s contract with GE allowed him to transition to CEO as the company emerged from bankruptcy and that’s when the rubber hit the road. In the next five years, it would shed headcount by 32 percent, turn over its senior management, relaunch its entire digital platform, reinvest in enterprise technology, realign its brands under new market groupings, and embark on a risky, but ultimately successful, “golden nugget” divestment strategy, selling off each of the company’s market verticals one by one.
After the dust settled, French, his senior management team and the Cygnus board managed to divest the company’s assets in five deals that collectively returned north of the $60 million in equity. In the meantime, the company eliminated $4 million to $5 million in operational costs, reinvested about that same amount back in (GE did not provide access to any of its own capital) and grew EBITDA by six percentage points.
The Cygnus turnaround and sale is remarkable given the amount of reinvestment that happened under very aggressive cost control, an employee base that chose to stay put and a divestment strategy, that in its systematic approach, ran counter to and outperformed the predictions of the banking community. All in a five-year timeline.
The hurdles were significant. The company had already been through multiple attempts at a sale, a succession of CEOs who couldn’t tame a rapidly changing market and had a beleaguered staff, who naturally sensed the company’s predicament and who suffered through years of salary freezes, pay cuts and hourly reductions. Morale was at an all-time low. And so were revenues, at around a reported $60 million.
A Suprise In the Books
To French’s dismay, as he began to dig through the books he realized Cygnus’ financials were in complete disarray. He describes the financial oversight at the time as absentee management—members of the department were spread out in different offices around the country. “On a month-to-month basis I couldn’t figure out if we were making money or losing money.”
And that’s when he made his first big move, hiring CFO Paul Bonaiuto, a former CFO at Journal Communications, Inc. “We cleaned house,” says French. “At the time Paul was retired and ambivalent about coming back to work. But he had the same interest I did. He wanted to do something. He didn’t want to be part of a big corporation and he wanted to roll up his sleeves. The first big milestone decision was finding Paul and hiring him because he straightened out the interior of the ship so we knew exactly what we had.”
French also hired Ed Wood has head of HR and from there French’s policy of honesty and transparency took shape—starting with his speech when he introduced himself to the 400 employees. This would be key to repairing staff morale and preventing a mass exodus. After all, Cygnus had two important phases ahead of it—regaining market performance and then divestment.
That year also saw the closure of a few non-core assets. More importantly, the company outsourced its fulfillment operation, which ultimately became the foundation of its digital strategy. “Cygnus was the only B2B company that I knew of that had in-house fulfillment,” says French. “Everyone else had outsourced it. We were on an HP platform that was 15 years old. The guys in IT were literally bandaging it together with elastics. There were five million subscribers on that. If it went, we had no idea what would happen.”
A new integrated database was built from the ground up that provided Cygnus with a 360-degree view of its audience. “Once we did that, it changed the whole complexion of the company—the revenue streams, the profitability, all that stuff happened in less than 24 months.”
In 2010, the company reorganized around a customer-facing affinity group structure, which ended up becoming the structure for French’s ultimate divestment strategy.
“The ulterior motive, which I didn’t tell people at the time, was I really believed that multi-industry platform companies that were going to be sold in the future of B2B were not going to be sold like the old days.”
Each of the groups—Aviation, Public Safety & Security, Building & Construction and Agriculture—was to be headed by an executive vice president who acted as a point person for Cygnus in their particular market, overseeing sales, content and marketing across all of the brand platforms, including events.
All along, while continuing to jettison small, non-core assets, French had also been shrinking headcount. In 2009, there were just over 400 full-time employees. In 2010, there were 340.
By 2011, the executive management team began to turn over in earnest. Ed Wood had already been hired, and French brought in Blair Johnson as SVP of business development and strategy and a top-heavy senior team of 20 was tightened up to 13. Positions that were exposed as redundant due to the new market vertical structure—mostly at the senior vice president and vice president levels—were phased out.
That year also saw an overhaul of the sales force, and the employee count shrank once more to 311.
Operationally, the digital platform took off. The company relaunched 40 websites in less than a year and integrated its content management system with its audience database and front-end website platform. The sales team also went through an official digital sales training program.
By 2012, the database integration was complete, giving Cygnus an audience look across print, digital and events for the first time. Vendor contracts were renegotiated, and along with other operational cost savings, the company was ultimately eliminating almost $5 million.
Time to Start Selling
In 2013, the company was firing on all cylinders operationally. The reorg was complete, the management team was in place and tightened up and overall staff had been cut down to 269.
But as it became evident to French that Cygnus was ready to enter into its divestment phase, the ongoing issue of staff morale became even more acute. Up to this point, it wasn’t just about cutting the employee base from 400 to 269. Resources needed to be provided for those who were still on board.
The business development phase, the investment in the new database and digital operations all helped refocus the employees on making the company better. “We were telling people we were selling the company, but the next day, you’d walk in and there would be a new program to launch data products—because we were continuing to invest even as we were selling,” says French.
Plus, employees were getting recognized for the work they were doing. “Within the first two years, over 50 percent of the existing employees either got a promotion and a raise or went to a new position,” says French. “And that hadn’t happened in almost six years.”
Additionally, management began to make investments in developing talent within the company—a foreign concept for a staff that had become used to cost cutting prior to the new leadership. “[Bonaiuto] helped middle managers better understand their businesses and he put together forecasting tools,” adds Gloria Cosby, EVP, Residential, Aviation, Technology & Transportation, who had been with Cygnus before it even became Cygnus. “They were educated on how the numbers worked and they were able to make changes in their businesses that made sense, rather than having them thrust upon them. They were part of that process and it created more ownership.”
Nevertheless, the company practically had a “for sale” sign tacked on it for years. And it created a sense of unease among staff. “The bigger issue—because there’s always a buyer at any price—is how do you keep employees engaged over a period of 18 months when they know that they could walk in tomorrow and be told they’ve been sold?” says French.
“It was scary as hell for the employees,” says Cosby. “We had been sold before, and had other companies bolted on to us. But when you start talking about selling off divisions, the support employees begin to realize that you don’t need a circulation or accounting department that big anymore. It was not knowing how many people or what the depth of the carnage might be that was frightening for many people.”
To calm those fears, French, Wood and the rest of executive management made sure that they kept the employees informed every step of the way. “He was able to speak honestly with the people in the organization and at any one moment, what he knew, they knew,” says Charlie McCurdy, chairman and CEO of Apprise Media and a Cygnus board member. “He was able to hold the organization together and hopefully find a buyer for the balance of the business and preserve the enterprise quite substantially. The fact that he gained the confidence of the organization and he stuck with them and they stuck with him through the end, that was the key, because if people started filing out the door and not coming back the next day, there would have been a very different outcome.”
In all, the perspective that the new management team brought with it, its expertise in B2B media specifically and its purposeful investment in talent went a long way. “They brought in a feeling of inclusion,” says Cosby. “That was all kind of new to us. It was the investment in the people and we had not seen that for a very long time.”
Perhaps not everyone bought into the message—“You’ve always got a handful of people who don’t want to believe,” says Cosby—but when the Ag group sold to the American Farm Bureau in August 2013, Cygnus’ first big divestment, and most of the staff went along with it, people started calming down.
The Golden Nuggets
And that first sale also crystallized the risky “golden nugget” divestment strategy. French, his management team and the board were betting that they could sell each of the market verticals in chunks, slicing off one at a time as the right buyer came along.
“You don’t see it done very often,” says McCurdy. “There can be tax reasons, there’s operational risks that if you sell certain businesses and other ones aren’t finding buyers you’re left with a sub-scale business. But based on John’s level of research and the board’s level of looking into this, it became very clear that the value of the business from an asset realization standpoint was likely to be significantly higher in golden nuggets than trying to find someone who wanted this particular array of pretty varied markets as a platform.”
But Cygnus had a reputation to contend with, too. After years of executive changes, cost-cutting, unsuccessful sale attempts and tanking revenues, the company couldn’t shake its stigma, despite its more recent victories under new management. And that’s what led to French’s “snow globe” theory.
“When we first went out and were talking to brokers about marketing the company they were talking about buyers that had been in B2B for a number of years and the response was tepid, at best. As much as we were making this great progress, Cygnus had this reputation,” he says. “It hit me one night: We were going about it all wrong. In the B2B industry we all live in the same snow globe. Every five or ten years a big hand comes down and shakes the snow globe and everything starts flying. When it settles down again, people who owned two companies own nothing or someone owned this company and now owns a different one. It’s like musical chairs.”
French realized that he needed to market the company beyond the usual suspects. “The Cygnus process was quite methodical and when we realized that by looking outside the snow globe and looking at each of these market sectors that we had some really valuable businesses in and of themselves that potential buyers would be very motivated to own,” says McCurdy. “And that got us outside the list of usual suspects of companies and investors from groups that would just buy B2B media assets in an environment where multiples were not really buoyant. “
Since the Ag group was driven largely by its four events, French hooked up with Nick Curci, who runs Corporate Solutions, a boutique brokerage that specializes in trade show M&A. Curci’s approach rounded up a list of prospects for the Ag group outside the typical buyer pool. That deal’s successful execution became a repeat engagement for Corporate Solutions, which ended up representing Cygnus on the next four transactions.
“Nick would come back to us with a list of people who had taken the book,” says French. “Out of the 30 or 50 or so, I would identify 20 that were outside of the snow globe. And those were the people we’d concentrate on. My theory was if you were outside the snow globe, you were probably going to pay a better price because you didn’t look at it with the baggage of the B2B industry. You looked at it as an asset. And it turned out because our prices were better because of that.”
“To turn that analysis from valuing a B2B company to valuing an added market presence—like the Ag group for the Farm Bureau—made it a totally different conversation,” adds McCurdy.
In the end, the sales collectively vindicated French, his team and the board. When they began marketing the company among the usual crowd of brokers, they were given a value—for the company as one piece—well below their internal estimates. What’s more, French says the banks believed chances were slim they’d find a buyer for the entire company, but advised against breaking it up. It was best to wait another 3-4 years, the banks said. That waiting period was a non-starter for French, since he was already under the gun to sell within five years after the bankruptcy. After 18 months, the five divestments returned more than the $60 million owed to the stakeholders and more than doubled what the banks had estimated. And, says French, many of the employees preserved their jobs through each of the sales.