Founded in 1986, Exacom, Inc. (www.exacom.com) grew to become a leading provider of multimedia software recording solutions for public safety, government and DoD mission-critical applications. In 2014, the three founders of the company transitioned their ownership to an Employee Stock Ownership Plan (ESOP). The ESOP owned 100% of the company and, in the aftermath of the ESOP transaction, it experienced some difficulties transitioning from an entrepreneurial led company to one that was owned and operated by an ESOP. To solve for the stagnation in growth, the company hired an outside professional manager with communication and enterprise software industry experience. The new CEO was able to institute some structural changes and refocus the company’s efforts on its technology and future development.
The new leadership grew the company by over 20% YOY for 3 consecutive years, earning an Inc. 5000 award. By 2019, the company was rapidly growing with strong and stable margins and continuing to develop its mission-critical technology. While the company had stabilized and was now on a strong foundation to capitalize on its refocused technology, the industry was continuing to change rapidly with larger players dominating market share. The public safety communications market was also being impacted by the increased speed of technology.
The CEO explained that “IoT everywhere” triggered a paradigm shift in capturing and recording the realty of situations in public safety and evidence management. Governments, public safety units, utilities, hospitals and financial institutions were being bombarded with new sources of data, all of which need to be recorded, unified, and saved for future uses such as evidence management, HR matters, insurance claims, etc.
The Next Steps
These macro industry changes provided strong tailwinds for Exacom, but theCEO and the company’s Board of Directors felt that its current size and capital structure were limiting its ability to capture the market opportunity. The Board felt that it needed capital to either acquire some of its competitors or rapidly invest in more personnel and research and development. In addition to the changing industry landscape, the value of the company’s stock had increased significantly, adding strain on managing the ESOP ownership dynamics and repurchase obligations. Finally, the company had received several unsolicited offers to acquire the business at potential valuations that the Board felt needed to be considered.
In short, Exacom had a strong reputation in the market and developed a premier public safety communications software platform, but it was unclear how the management team would be able to capture the future market opportunities while sustaining the value the company had achieved to date. The confluence of factors of large competitors, changing industry dynamics and managing the ESOP, led the Board of Directors to meet with Peloton Advisory to discuss its strategic alternatives. It was important to the Board that Peloton Advisory had specific experience in working with ESOP-owned companies and understood not only the cultural dynamics of an ESOP workforce, but the many potential traps for the unwary found in executing transactions involving ESOP-owned companies.
After several months of discussions with the Board and management, Peloton was formally engaged in February, 2020. Peloton’s mandate was to find a partner that shared the management’s strategic vision and possessed the experience and capital resources to help it achieve its growth potential in a rapidly changing industry. This partner also needed to understand the employee ownership dynamics of an ESOP as well some of the unique transactional issues in dealing with an ESOP.
With assistance from management and the company’s outside advisors, Peloton quickly got up to speed on the industry and began to position the company with the goal of proactively seeking an investor that would appreciate Exacom’s reputation, capabilities, culture, employees, and proprietary technology in mission-critical communication applications. The plan was to launch the transaction in mid-March of 2020….then the world was turned upside down by the COVID-19 pandemic!
Peloton and the Board immediately recognized that the company was not in a position to move forward with its original schedule as the pandemic shut down the entire economy, including the M&A markets. While the transaction was put on hold, the company focused on instituting appropriate protocols for the safety of its employees and customers while continuing to conduct its business as it was deemed “essential”. Peloton continued its work, with its main focus on determining when would be the right time to move forward with having discussions with potential investors.
By early May, Peloton did not expect the M&A market to rebound immediately (as some pundits suggested), with the speed and vibrancy differing based on industries, but that there would be opportunities to complete transactions with companies whose businesses have not been materially impacted in the wake of the pandemic. Peloton suggested that stronger companies will likely continue to command strong valuations due to the scarcity of such opportunities at this time (essentially benefitting from a classic over-demand and under-supply dynamic).
With this in mind, Peloton recommended to the Board of Directors that it begin outreach for the company in early May 2020. Peloton understood that this was potentially early in the recovery of the transactional market, but believed this may benefit Exacom while allowing for a more flexible process depending on how quickly (or slowly) the investors were able to act and how the general economy progressed.
A Successful Outcome
The recommendation proved correct. Peloton quickly created a competitive process with multiple strategic and financial investors. Exacom ultimately decided to partner with Seaport Capital, a private equity firm that invests in communication infrastructure and services, business and information services and media companies. Exacom is a platform investment for Seaport Capital and the firm is focused on supporting the company’s management team, expanding the company’s reach and capabilities and growing the company organically and through opportunistic acquisitions. The transaction structure allowed for the management team to re-invest in the future growth of the company while providing a significant liquidity event for the ESOP participants. The enterprise value achieved by the ESOP participants by working with Peloton was in excess of 100% of the most current independent ESOP valuation. A huge success!
View transaction announcement.