<b>M&A expert sees lessons learned from recent spree</b>

Peter Schelfhaudt spearheaded an impressive series of buyouts in the late '90s. Now he's back - picking up a piece of his former puzzle. Paul Cordasco reports.

Peter Schelfhaudt spearheaded an impressive series of buyouts in the late '90s. Now he's back - picking up a piece of his former puzzle. Paul Cordasco reports.

After selling his PR agency to Earle Palmer Brown in 1994, Peter Schelfhaudt helped lead a rapid expansion program at EPB that was based almost entirely on a string of acquisitions through parent company Panoramic Communications. The goal: quickly assemble a marketing communications supermarket and eventually take it public, according to Schelfhaudt, who headed the M&A department at EPB. Now, five years after Schelfhaudt began overseeing the spree of 24 buyouts and mergers in three years, Panoramic is in the process of unraveling many of its purchases, as the company's future seems very much in doubt. In May, Swiss Communications company PubliGroupe, which acquired a majority stake in Panoramic in December 2000, announced it would stop pouring money into Panoramic, describing the venture as a "failure." The quick-growth question Since PubliGroupe's announcement, Panoramic has been selling many of its assets, mostly via management-led buyouts. Ironically, Schelfhaudt himself spearheaded a group of managers who purchased marketing communications firm Creative Partners, which he helped bring to Panoramic. As the spate of once high-flying companies that formed or expanded through mergers and acquisitions in the 1990s begins to crash back down to earth - AOL Time Warner, WorldCom, AT&T, and Cisco Systems, for example - the wisdom of the quick-growth M&A strategy has come into question. After enjoying a front-row seat to the 1990s auction for PR and marketing assets, Schelfhaudt says the most important lesson he learned is that a firm and its clients are best served through owner-run enterprises. He also says that the nature of the businesses and the structure of the deals can foster a system of "absentee landlords" where the ultimate taskmaster becomes Wall Street, which is chronically myopic. However, Schelfhaudt does not seem surprised that much of his acquisition spree is now being unwound. He says that as Panoramic grew, the organization became more stratified and unwieldy. By the end of the shopping spree, the company's ultimate decision makers were located in Switzerland, after PubliGroupe took its stake. "Because of the way the deals were structured and because of the rapid pace we were making acquisitions, we had to leave the management of the companies we bought mostly autonomous," Schelfhaudt explains. "Essentially we owned all these companies, but they were running themselves." Add to the mix the acquisition of Panoramic by PubliGroupe, which, according to Schelfhaudt, didn't help matters. "Then in comes PubliGroupe and suddenly there's another level of management added on top," he says. "All of a sudden, ownership is getting further and further away from where the action is taking place." Schelfhaudt says that a view from the trenches is a perspective management and ownership should share in a business that is based on serving the needs of a client. "My firm's motto is, 'Clients for life,'" says Schelfhaudt, who serves as president of Creative Partners. "I think that contrasts nicely with a big, publicly traded multinational firm, where the motto could be summed up as 'Profits for the quarter.'" Lance Mald, CEO of EPB, and Jeb Brown, former CEO of Panoramic, declined to comment on Schelfhaudt's opinions about Panoramic's acquisition strategy. Despite having the limited resources of a privately held company, Panoramic was able to finance acquisitions through a combination of cash payments and equity. However, a key to nearly every acquisition was the "earn-out" provision. Earn-outs are designed to ratchet up the value of the original buyout by promising future payments to the sellers should the acquired business meet earnings growth targets in future years. These provisions have become nearly a standard part of most buyouts of professional service firms and are meant to protect the buyer in two ways. First, they are designed to limit the downside of the acquisition by staggering payments based on the future performance of the acquired business. Second, they are supposed to provide the principals with an incentive to continue running their businesses after the sale. This installment-plan method of acquisition is not without pitfalls to the buyers. Some of the bills for boom-time buyouts can continue to come due during lean times. Success or failure? Still, Schelfhaudt says some of the acquisitions were successful, and he hesitates to categorize his M&A spree as a total success or a complete failure. When pressed, he blames unfortunate timing and a market that gave sellers an unprecedented amount of leverage. "We made many purchases in 1999 and 2000, the best years in the history of advertising," Schelfhaudt says. He also says the long-term success of any acquisition depends upon the investment that the buyer is willing to put into it. Schelfhaudt says much of the time the acquirer's management is pressed to show quick results from a buyout - but often at the cost of undermining what was the true value of the acquired business. "Oftentimes, the parent company will diminish the value of the companies they acquire, and in our business that often means cutting people," says Schelfhaudt. "If you come in with the attitude that the first thing you are going to do is shave 20% off payroll, that will obviously affect service and the client relationships will suffer." Nevertheless, the earn-out structure gave the principals in the deals a significant amount of autonomy, according to Schelfhaudt, and it made the parent firm seem like a distant entity. Under that type of structure, the few decisions that a parent company does make that have implications for their various businesses can seem capricious. For instance, according to Schelfhaudt, during the boom he encountered a significant amount of resentment that traditional agencies had toward PR and marketing firms that were focused on the new economy. Despite the fact that the traditional agencies were often more established and stable, the technology and Internet start-ups were grabbing all the attention and being snapped up at valuations that often exceeded those of the older companies. Schelfhaudt says such resentment threatened to undermine one of the most important factors to his success - finding synergies and getting people to work together. Looking back on the events of last decade, Schelfhaudt has an interesting take on the ultimate winners and losers of the 1990s. "In one sense, the traditional companies had the last laugh because most of the internet and technology-only companies folded," he reflects. Yet he quickly adds with an ironic grin: "But in another sense, the tech firms really had the last laugh because they took the money and ran. Who would you rather be?" The ultimate lesson that Schelfhaudt learned is that PR and marketing businesses are built on client relationships. "The strongest businesses I came across were firms that could claim some accounts dating back for, in some cases, decades," he says. "This business is about client service before anything else, and as soon as you lose sight of that you are in trouble."

------------------------------------------- Ins and outs: Schelfhaudt's M&A timeline Peter Schelfhaudt, who played a significant role in 24 mergers or acquisitions from 1997 to 2000 while at Panoramic, has had a change of heart about the entire process. Chronicled below are the M&A-related events that have surrounded Schelfhaudt since 1994. 1994 Earle Palmer Brown buys out Schelfhaudt's firm, Kerr Kelly Thompson 1997 Panoramic begins its acquisition spree. Schelfhaudt helps make 24 purchases over the next three years December 2000 PubliGroupe acquires majority stake in Panoramic May 2002 PubliGroupe announces it is walking away from the Panoramic venture, declaring it a "failure" August 2002 Schelfhaudt leads management buyout of Panoramic firm Creative Partners

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