Carve-Out vs. Wind-Down: A Guide to a Complex Exit

Speaker A: Foreign. Welcome to ACG's Middle Market Growth. I'm Carolyn Vallejo. Companies don't need to be broadly distressed to face a serious strategic challenge. Sometimes an otherwise healthy enterprise has a division that is consuming capital, management, attention and operational resources, and traditional sale efforts or an internal shutdown are not viable in those situations. A carefully structured carve out or wind down can protect the core business and create room for renewed growth. Joining us to discuss how leaders can evaluate and execute these complex exits is Eric Kaupp, Chief Commercial Officer at Hillco Global. Eric, thank you so much for being here.

Speaker B: Hey, it's great to be here. Thank you very much.

Speaker A: Let's get to know you a little bit first. Tell us about your role at Hilco.

Speaker B: Sure. I've been at Hilco for a very long time, longer than I can believe sometimes. I came here in January of 2004 as a lawyer straight from the restructuring group at the Chicago office of Skadden Arps. I was the lawyer in house lawyer at Hillco until January of 2024. So 20 full years of being in house lawyer at Hillco and, and In January of 2024 I took a new role as chief Commercial officer. The idea being that as an in house lawyer at Hillco, I had seen every transaction from every angle in every business that Hillco operated. And so the idea was that I could go out into the universe and find new places and new kinds of deals, bigger deals for Hillco to do, um, using sort of this unique knowledge of what Hilco can do and Hilco thinking is sometimes how I, uh, describe it.

Speaker A: Okay, so a lot of experience here which I'm excited to get into. But before that, just for a little bit of fun, if you had to choose any walk up song, what would it be?

Speaker B: I would say probably I Walk the Line by Johnny Cash. That probably would be.

Speaker A: That's a great one. Great choice. All right, let's get into our main topic Today we are exploring a scenario that we introduced up top. What happens when an otherwise healthy business has a division that is increasingly unhealthy healthy? How can they kind of respond there? Can you kick us off and maybe respond to that scenario?

Speaker B: Of course, yeah. I think that it's an interesting topic because for me it's just a natural outgrowth of a traditional Hilco transaction. So traditionally Hilco would buy assets that were good assets out of bad companies. So something that was not going well at a company but the assets were still productive and useful. So maybe a company had a nice set of machinery, equipment at a uh, factory, but they did a systems upgrade tariff. Something happened and the company was no longer profitable, but the assets were still very valuable. The same thing could be said for a subsidiary or a division within a larger healthy company. Again, the company could be very healthy. However, one division is not performing for, you know, a variety of reason. And so if you can shut down that division, shut down that subsidiary and keep the parent whole, then you're doing, in our, in our parlance, maybe, uh, a form of addition by subtraction. And in that way, you know, Hilco thinking rather than traditional sort of growth thinking is just a unique perspective on that particular situation.

Speaker A: Addition by subtraction. I like that. And it's interesting because if a company, you know, identifies a business unit that is increasingly unhealthy, as we said, there are a couple options that they have. They can sell, they can restructure, they can separate, they can wind down the unit. Tell me about how a company should decide which direction to take.

Speaker B: I mean, in almost every instance, it's hard for me to say anything other than the company should try to maximize the value, even in that terrible situation, of an unprofitable or poorly performing division or subsidiary. In almost every case, these companies try to sell the subsidiary. That's the easy button in these situations. However, I think a lot of times people underestimate how difficult it is to sell something that may not be performing that well. So usually companies try to do the sale process. It doesn't work. They have to get a reverse purchase price, meaning they have to pay someone to take it. And now they have the uncomfortable decision of what do we do internally? Do we shift a whole group of people and management attention to winding something down? Of course, that's not the traditional management function, is certainly not what people like working on. And so I think one of the things that companies need to think about and when they make this decision is, you know, opportunity costs. So what, what is the cost of having a group of talented management people spend a lot of time and a lot of money doing something that they don't want to do and is really not targeted towards specific growth of the company?

Speaker A: It's so interesting that you mentioned how sometimes a company may want to sell, assuming that's, I think, the easy button is the kind of the term that you used. And of course, you know, a lot times they'll find out it really isn't as easy maybe as I thought it was going to be. So I'm curious, why can an outside partner sometimes be better positioned to execute either a complex separation or a wind down than maybe the parent company handling that process itself.

Speaker B: It's a great observation and I do think it has something to do with uh, a management team at a company is set up to grow that company. That's their entire focus, growth. That's what any market rewards, any private, public market. They want growth. And so the idea of contracting, the idea of, of shutting something down as opposed to selling is just sort of the antithesis of a management team's general attitude and skill set. And so you know, a sale is like a, so you know, an acceptable way of moving uh, away from something, winding it down internally. That's just not an assignment that people are going to get paid their bonus. It's not a assignment that the market rewards. And so I think in that way, when I talk about Hilco thinking, Hilco has been in the, in the land of distressed transactions for as long as it's been in existence. And so Hilco thinking is about maximizing the revenues while eliminating cost because both of those factors provide the value when you're shutting something down.

Speaker A: Let's take some of the concepts that we've been discussing so far and apply them to a real world scenario. Tell me about the example of Pinbo's Global E Commerce Division and your experience there. What challenge was the company facing? How did Hilco Global structure the solution? Tell me about that experience.

Speaker B: Sure, that's a great example. So Pitney Bowes, very, very storied, long, long standing company, public company, had a number of great businesses all tied to the US Mail. And as an opportunity for growth, they set up a E Commerce delivery and return system utilizing their many, many contacts with the U.S. postal Service. This business however, just couldn't get enough revenue. That's a very hotly contested market and they just couldn't get to a place where that business was not losing upwards of $100 million a year. They called us on kind of what I jokingly refer to often as kind of a Neanderthal project for Hilco. Like how can, can you help us with these conveyors? Because they had these beautiful conveyor systems in like their 13 facilities. And of course we could help them do that. That's a very traditional Hilco assignment. But we were able to sort of walk up the C suite asking Pitney Bowes, what are you trying to do here? And the answer came back, we can't sell this subsidiary without paying a pretty intensive, uh, reverse purchase price. And we want to shut this subsidiary down. And we were able to structure a very Unique transaction there that satisfied Pitney Bowes and its stakeholders in a variety of ways.

Speaker A: Registration is now open for ACG's Aerospace and Defense Middle Market Leadership Forum on October 14th and 15th in Los Angeles. To learn more and register, visit ACG.orgAD26. That's ACG.orgAD26. It's so impressive because I think a lot of times uh, a service provider of course will do what the client is asking them to do. But to ask about the context, why are you, are you looking to do this? Is there a better way to move forward here? I think that's a really interesting point that you made about Hilco's approach there and just a really interesting point that I wanted to kind of highlight there. How do you measure the success of a wind down like that? What outcomes were most important to Hilco? To Pitney Depots, especially for, you know, the employees involved, the customers, all the vendors involved.

Speaker B: That's right. And so what we're trying to do a lot of is pitch solutions rather than transactions. So when you're talking to a customer or a client about what is the solution that you require, I think you get to a more comprehensive answer for that customer or client. In the Pitney Bow situation, I think there are a variety of wins. One of those wins was the way we structured the transaction. We actually bought the subsidiary for a dollar and in so doing unsubbed the subsidiary, which means that it was no longer defined as a capital S subsidiary under its indenture to um, allowing that subsidiary to go into a chapter 11 without tripping a default. Under the parents indenture, they had a couple bonds that they had very long term bonds at favorable rates and they didn't want to renegotiate that and take the time or the increased costs that would have come with that. So by doing our transaction in the way that we transacted, we were able to save Pitney Bowes a lot of time and money and not renegotiating their indenture. Separately, we were able to communicate with employees. We gave them enough time to find uh, new jobs. We implemented a very, uh, healthy and respectful severance program that Pitney Bowes had come into place. And of the 1500 or so Pitney Bowes employees, we didn't receive a single claim in the bankruptcy court or otherwise from any of those employees. In addition, we went through a very tricky negotiation with the U.S. postal Service who was a partner with Pitney Bowes and an important partner to Pitney Bowes in that, you know, Pitney Bowes does most of its business in and around the U.S. mail service. And we were able to talk to them on a weekly basis and get that situation to a point where the Postal Service was very comfortable with what happened, had no questions and we never heard anything other than thank you very much and this has been handled. So in those ways we were very successful. In addition to the fact that we came in about about half of their budget, what they had internally budgeted for shutting down this division and probably two thirds of the time. So in almost all respects in that situation, we came in very well. And what's interesting about that and what I love to talk about while I'm at Hilco is the stock price of Pitney Bowes was something in uh, five, just, just under $6 a share when we did the transaction and it's been as high as 17 in the last couple months. So it's very rare that Hilco has a situation where that kind of a tangible result is so obvious.

Speaker A: Mhm. Yeah, absolutely. Now there's another example, there's another scenario, a real world example that I want you to talk a little bit more about. This one involving a cross border exit and Design Group Americas, I believe, was the, uh, was the company you were working with. Can you tell me about kind of this scenario and maybe new challenges that this situation introduced?

Speaker B: Absolutely. So Design Group America is interesting, as you say, because of the cross border implications there and primarily there just an unfamiliarity by the UK parent with the US Chapter 11 process. So making sure that those people understood what we were doing, making sure they understood how they should interact with the Chapter 11 estate, was kind of a useful but challenging exercise in that case. The other thing about Design Group America is that in these situations where you're selling a subsidiary or selling a division, typically the parent tries to sell that company or that subsidiary in its entirety. So they try to sell a whole group of assets or a whole group of subset of companies. And when you actually now just own the subsidiary, it's much easier to sell uh, those divisions of that subsidiary individually. So for example, in Design Group America, there was really no buyer for that entire U.S. business. That really wasn't something that anybody was interested in. However, we were able to sell six of the nine businesses to individual buyers of those individual businesses. And that's a degree of work and focus that you probably can't get unless you're bringing in, you know, a group like Hillco that's willing to sort of focus on the details.

Speaker A: Yeah, that, that detailed focus I Imagine is also key. And considering some of the takeaways, some of the lessons that we can learn from both of these scenarios, I want to know a little bit more about what a successful outcome looks like. And I know you've mentioned, for example, the execution has come in under budget, ahead of schedule. That's, that's excellent. But what other factors does it kind of lend to a successful, a successful execution of this type of really complex transaction. At the same time, I'm also curious about some of the biggest risks of executing this type of transaction.

Speaker B: That's a terrific perspective because one of the things that makes Hillco successful in this endeavor, where you're winding down larger groups of larger organizations, a subsidiary company, there are a lot of employees and this is not a situation in which the parent is interested in torching their corporate reputation by not treating their employees with respect or with some sort of grace. And so in these situations, Hilco's typically buying the subsidiary. Hilco has corporate governance rights over the subsidiaries. And so one of the things that I, uh, have prided myself and Hilco on is making sure that in every situation we're treating these employees, employees with respect. So giving them um, as much notice as you can as early as possible, providing clarity, explaining the severance program. Maybe there's a retention program to keep people around, but giving people the best opportunity to find a new place to work is one of the hallmarks of our success. In addition to, as in the Pitney Bow situation, having a successful exit negotiation with a key stakeholder like the U.S. postal Service and, and not torching that relationship on behalf of Pitney Bowes is very important. And having the trust of the parent that Hilco is going to cultivate and preserve either employee relationships, customer relationships, stakeholder relationships, those are as important for a parent when talking about maybe getting rid of a subsidiary as a division as the uh, dollars and cents.

Speaker A: Got it. So I imagine that uh, considering how complex these transactions are and how each scenario can be different, present unique challenges, it's not one factor that defines success. And the factors that do define success, I imagine are going to look somewhat different for every transaction. Would you agree?

Speaker B: Oh, absolutely. Sometimes people are very, these companies are very worried about the employees. Sometimes they need to, to affect some kind of structural transaction that allows them to get wind down a subsidiary in the confines of its financing or other arrangements. And so every situation here is different. One of my big frustrations in life is that you just have to kiss a lot of frogs here because this is not like a, uh, cookie cutter type of solution and not every situation the same. So I am out in the universe kissing frogs, trying to find these situations everywhere.

Speaker A: Kissing frogs, yeah. Well, to close this out, Eric, we love to kind of close our conversations on the podcast with some actionable guidance, some advice that listeners can apply to their own businesses, their own scenarios. So what advice would you give business leaders that are evaluating, uh, an underperforming or non core business unit today?

Speaker B: I mean, the first bit of advice I would give someone is at the same time that you're going to launch a sale process to sell the subsidiary. Because I'm sure most C suites are going to launch a sale process. If you can try to set up a parallel process for winding the subsidiary down in the event that the, uh, sale process is not effective, I think that probably means devoting the resources of one or two people at the company to the wind down side of the equation. However, that will be far less management time and resources than trying to do it on your own. Because in every situation people have these delays. So you go from a sale process and if you don't, if that doesn't work now, you have to pivot back and weeks, months can go by before you're able to affect maybe a wind down process. So if you can kind of set up a shadow wind down process with the sale, you can have almost a seamless transition. And either you're going to sell the business or you're going to wind it down. But in any event, your, your problem is going to be solved.

Speaker A: Yeah, you certainly don't have to go it alone in these really complex situations. All right, that is Eric Kaup, Chief Commercial Officer at Hillco Global. Eric, thank you so much for joining us today. It's been a pleasure.

Speaker B: Thanks, Carolyn. I appreciate it.

Speaker C: Thank you for listening to this episode of the Middle Market Growth Podcast. Hear more episodes and discover more M and A thought leadership@acginsights.org if you haven't yet, please subscribe at Apple Podcasts, Spotify or wherever you listen to podcasts. And don't forget to rate and review. The Middle Market Growth Podcast is produced by the association for Corporate Growth. Learn more about us and discover new opportunities to network with middle market dealmakers@acg.org.