ABBRY and F+W

Lessons of ABRY Partners and F+W Publications

An Acquisition case study

Agenda1. Introduction2. Description of the companies and their

M&A3. The transaction4. The investigation5. Questions6. Conclusions

1. Introduction

$500 million

2. F+W Publications (acquired firm)• publisher of periodicals and books• book clubs, conferences, trade

shows, websites• acquired by Providence Equity

Partners in 2002 for $130m• revenues 2002 - $106m   • 2004 - $250 m• sold to ABRY in 2005 for $500m

2. ABRY Partners (buyer)

• Private Equity firm• founded in 1989 by Andrew Banks &

Royce Yudkoff• Focused on media & communications

industry •  target investments  $20m - $100m• by 2005 had $2,1 billion under

management from limited partners• bought FW Publications for $500m in 2005

2. Providence Equity Partner (seller)• Private Equity firm• Focused on media & communications

industry • by 2005 had $9 billion under management

from limited partners• target investments  $20m - $500m• 2002-2004 - invested $150m in F+W

Publications • bought FW Publications for $130m in 2002 • sold FW Publications to ABRY

3. The transaction

4. Results of the investigation

• Overstated financial results 

• Problems with the Inventory Management System

4. Results of the investigation –overstated financial results

EBITDA boosted about $ 10 million by:

• Backstarting 

• Reporting budgeted amounts instead of real

results 

• Delay in recording costs and adjustments 

• Underestimation of  obsolete inventory and

uncollectible accounts  

• Channel stuffing

4. Results of the investigation –problem with IMS

• What is VISTA?• VISTA – new, integrated software

solution managing orders inventory, accounts receivables, subscription and other transaction data.

• There were problems with the VISTA system but they were all hushed up by CEO Stephen Kent.

4. Results of the investigation –problem with IMS (2)• Three main problems:

1) Failure of the system for several weeks. 2)Communication issues. 3)Closed trade agreement with Amazon.

Suming up:• Approximately $500 000 spent on

external consultants. • Significant internal resources used.

5. QuestionsWould you advise Royce Yudkoff, Managing Partner of ABRY, to file the lawsuit? Why or why not?What is the upside/downside of filing the suit vs. settling the complaint for ABRY? For Providence?Was ABRY defrauded?If you were a limited partner (investor) in ABRY, how would you react to news of the lawsuit? What if you were an investor in Providence?

5. Questions1. Would you advise Royce Yudkoff, Managing Partner of ABRY, to file the lawsuit? Why or why not? We advise to file the lawsuit as many misleading actions occurred. FW Publications lied intentionally about the financial statements what resulted in lower value of the company. Apart from manipulating F&W’s financial statements, they also  overstated its earnings and artificially inflated EBITDA and as a result of these misrepresentations, ABRY overpaid for F&W by approximately $100 million. In the agreement there was an article that limited the Providence responsibility to $20m for any post-closing claims and damages, but in this case it is too little sum of money, that’s why we advise to sue the Providence.

5. Questions2. What is the upside/downside of filing the suit vs. settling the complaint for ABRY? For Providence?

  ABRY Providence

Upside Downside Upside Downside

filing the suit

•High compensation when winning the case, •End of deal

• High costs of layers to cover when losing the case•Unreliabale partner

•A chance to prove the innocence

•A risk of paying compensation•Drop of share prices•Lose of clear brand identity

settling the complaint

•More lucrative deal•End of deal

•Impossible •A chance to smooth over ABRY’s anger and make a counter offer

•Impossible

5. Questions3. Was ABRY defrauded?We decided, that it was a fraud in this case, because in accordance with the definition of fraud there was an intentional mislead that was motivated by the desire to deceive another to his harm. What is more Providence failed to disclose all information about the financial situation of FW Publications and they had manipulated financial statements what is also a defence 

5. Questions4. If you were a limited partner (investor) in ABRY, how would you react to news of the lawsuit? What if you were an investor in Providence?

Under circumstances of lawsuit, as an investor of Providence or ABRY, we would like to withdraw financial sources. The risk of investment would rapidly increase. The probability of incurring additional cost is very high. As a result we would take under consideration to sell shares of those companies. 

6. ConclusionsThe Share Purchase Agreement is essential

therefore both buyers and sellers should:• carefully neogtiate the idemnification

provisions to ensure appropriate risk allocation,

• carefully negotiate the ‘no reliance’ provision describing the information the buyer relies on so even if the seller acts recklessly or with gross negligence, one will not be able to insulate itself from potential liability by contract against its own lies, intentional misrepresentations or fraud.