Lessons of ABRY Partners and F+W

Publications

An Acquisition case study

Agenda
1. Introduction
2. Description of the companies and their
M&A
3. The transaction
4. The investigation
5. Questions
6. 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 Yudkof
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. Questions
Would you advise Royce Yudkof, 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. Questions
1. Would you advise Royce Yudkof, 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&Ws 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 postclosing claims and damages, but in this case it is too
little sum of money, thats why we advise to sue the
Providence.

5. Questions
2. 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
compensatio
n 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
ABRYs anger
and make a
counter ofer

Impossible

5. Questions
3. 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. Questions
4. 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. Conclusions
The 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.