In 1999, Hanley Wood, publisher of Builder, was acquired by a private equity fund operated by Veronis Suhler for about $260 million. Six years later, the construction industry media company was sold to an investment group led by J.P. Morgan Partners for $650 million.
Hanley Wood's increase in value was due in large part to a number of successful acquisitions in the construction industry, such as Public Works and the World of Concrete trade show. Among industry observers and b-to-b media executives, Hanley Wood has a strong reputation for its due diligence process.
"They've been very active over the last five years in buying things, and it doesn't seem that they've made too many mistakes," said Dick Ryan, president-CEO of ZweigWhite, a building industry consulting, information and media firm.
Hanley Wood executives are proud of their rigorous due diligence. "We have a pretty formal process," said Peter Goldstone, president of Hanley Wood Magazines.
But Mike Wood, Hanley Wood board member and former CEO, said the company's due diligence process, despite its thoroughness, doesn't always work as designed.
Wood pointed to Hanley Wood's acquisition of the Meyers Group in 2004 as an example of due diligence gone awry. The Meyers Group sells construction industry data and consulting services, and the Hanley Wood team saw the acquisition as an opportunity to expand into the sale of rich data.
In retrospect, Wood now says his eagerness to complete the deal may have short circuited the due diligence process, which some observers divide into two parts: assessing the financial numbers and evaluating the management team.
In the case of the Meyers Group, the financial numbers checked out positively. There was, however, a personnel issue that Wood said should have given him more pause. Tim Sullivan, an executive at the Meyers Group, whom company president Jeff Meyers described as a "superstar," was responsible for the firm's consulting business, which accounted for one-third of its revenue.
Wood arranged to meet Sullivan during a visit to Costa Mesa, Calif., where the Meyers Group, now called Hanley Wood Market Intelligence, is based. "Tim Sullivan didn't show," Wood said. "Of course, I was wary, but I wanted to buy the company." Given assurances by Meyers that Sullivan posed no threat, Wood pulled the trigger on the deal.
A few months after the deal closed, Sullivan left Hanley Wood and opened his own consulting firm with several former Meyers Group employees. The move disrupted Hanley Wood's revenue stream from the business for about six months, but Wood said the unit has since recovered.
"Why didn't I insist on meeting Tim Sullivan?" Wood asks himself. "I wanted the deal. I loved the deal. I still love the deal, and you know I allowed myself to be convinced."
Wood said the lesson is to follow through on every aspect of due diligence. "I think when something goes wrong with the deal, it is usually something very obvious and not something that is buried in the nitty-gritty," he said.
Another lesson has to do with employment agreements. Hanley Wood's general policy is not to enter into explicit employment agreements with the executives at acquired companies. Because Sullivan had no employment agreement—and thus no noncompete restrictions—he was free to start his own business.
"If ever there's a situation where one guy is a lighting rod for millions of dollars of revenue, I wouldn't make the same mistake again," Wood said.