A specific case study, Richey Electronics, illustrates Palisades’ approach to troubled businesses. This extraordinarily successful set of transactions combined elements of principled investment and operational turnaround expertise.
Strategic purchase: During the late 1980’s, the distribution sector for active electronic components rapidly consolidated. Palisades concluded that the smaller passive segment was also ripe for consolidation. In 1990, Palisades learned that Richey/Impact Electronics, the passive-component subsidiary of a larger company, was available for purchase. At that time, Richey was losing almost $3 million annually in EBITDA on $32 million in sales.
Cost rationalization: Palisades teamed with a group of veteran managers from the industry to acquire Richey for $7.2 million, and quickly trim operating costs. By the end of 1991, the company was returned to breakeven.
Roll-up of complementary businesses: With a solid operating company as the cornerstone, Palisades executed a series of acquisitions: Brajdas Corporation in 1993; the In-Stock Electronics division of Anchor Group in 1994; Inland Empire Interconnects and Deanco Inc. in 1995; and MS Electronics, Summit Distributors and Simmonds Technologies in 1996. Each acquisition filled an important gap in Richey’s product line or regional presence, giving the combined company an unparalleled line card and nationwide distribution network.
Careful design of capital structure: Throughout the course of these acquisitions, Palisades chose financing vehicles and corporate structures that were tax-efficient and maximized shareholder value. These included a reverse merger of Brajdas, preserving its $23 million net operating loss carryforward and its public market; a subsequent underwritten public offering; $75 million in syndicated commercial credit; and $55 million in convertible subordinated notes.
Timely exit: In 1998, Arrow Electronics, the world’s largest semiconductor distributor, expressed interest in acquiring Richey, understanding the value of its leading passive-component position. This transaction closed in January 1999 for total consideration of approximately $180 million, with Richey’s equity holders receiving almost $100 million.
Palisades personnel were deeply involved at every step in building Richey: targeting acquisition candidates, performing due diligence, negotiating a variety of transaction types and financing instruments, and directing corporate strategy and cost-cutting tactics. Palisades’ investors who held their stock through the eight-year period made back nearly thirty times their investment.