Well, this happened: Lifecore Biomedical to be Acquired by Webster Equity Partners

And it ends a 4-year saga with lots of investing and life lessons. CSC was a top 3 equity holder in Lifecore at one point, NDAs were signed, Board’s and management were harangued and supported at various times on change and strategic direction, and we ended up as soley a convertible preferred holder over the past 2 years. I am going to “guess” with any variety of buy lower, sell higher moments in the equity, plus the PIKing in the preferred over that time, plus penalty payments to the preferred as a result of management incompetence in producing timely financial statements, we managed roughly a 12% annualized return over close to 5 years, math I will deny if chosen to defend it in front of a committee with really good math skills. A far cry from the “5 bagger or more” than was spreadsheet obvious at inception.

This is a reasonably elegant solution to a balance sheet problem, which was OBVIOUSLY an immovable object in the path of what was a legitimately solid company building process by the new CEO Paul Josephs. A deal had to be done.

• Random learning statements to wit:
  When investing in smaller companies, you cannot possibly underestimate the possibility that they are incompletely undermanaged and incapable of executing what looks genius and obvious on the paper in front of you. “We are a domestic CDMO with capacity in a world with no capacity and a wave of “onshoring” drug production for example. You need to spend time with the people, not just the math.
• Strongly consider the possibility that management can and will say anything to you that fills the blank to convince you to invest – debt or equity. Whether you are being fed “aspirational” math or something worse remains and interesting question for the investor.
• It is my blanket statement I hold true that “equity holders know jack-shit about debt” and if you are going to be an equity investor in a leveraged company, you need to understand you are the bottom tier of capital structure, assume people higher than you don’t have your best interests at heart, you should carefully position weight, you should have a quick trigger and you need to be right sooner, not later. Oh, and have a law firm representing you that is also debt experienced. And make sure there is a “no-sweep” clause when you are the genius new money. The lure of “the biggest upside is in a leveraged equity the day before it doesn’t go bankrupt” is a dangerous game.
• Being on a Board of a large equity holding makes imminent sense if you know what you are doing and there is NOT a giant pile of turd awaiting you. If it is more the latter than the former, then you are “sort of” stuck both legally and optically as a professional. I “missed” being a large shareholder to join the board by threads and as it turned out, it was the best thing that never happened to me. I was able to sell all equity with a $9 handle.
• Owning both the equity and debt as a Board member or otherwise can be unhelpful in certain cases. Let’s say you are an equity holder, and are evaluating a PIPE via a debt-like instrument in order to give the company breathing room from a “temporary” issue. New, mean, debt money would be insisting on much more onerous terms than the equity holder player. On a board, you cannot help but be hopelessly conflicted and then find yourself being excluded from all the fun committees like “Going Concern” or “Strategic Alternatives.” And in light of today’s credit world, where the same firm in 4 different structures with different clients owns different pieces of a capital stack, how in God’s name is incentive and fiduciary responsibility resolved? Buyer beware.
• The answer of course is lawyers. I would love to see an accounting of Latham’s legal fees here over the past 5 years and while a law firm is really a collection of lawyers, and thus it’s unfair to call out an entire firm, what fun is that? Why in God’s name a firm this size had a firm like Latham was a mystery, like the mystery of why a firm this size had Morgan Stanley as its investment banker when they whiffed on the last Strategic Alternatives review. The answer is usually, a Board member “has a friend who knows a guy.” It is crucial for a Board to pick counsel and bankers that are “properly sized” and properly vertical focused in order to execute. And kudos to bankers Bourne Associates, who hung around this hoop for a long time with nada and snagged a win at the end.
• On the lawyer note, and while I have professionally tried to swear off embarrassing my fellow man publicly, another exception is offered. A Board Chair should NEVER BE a LAWYER. Lawyers do not drive value, they in theory police and write-up the progress. I am simply going to say that if a Craig A. Barbarosh is the Chairman of your board, it is a problem.
• The online world is just full of what seems like detailed, 40-page analysis that is proper formatted, quality freshman year Wharton output (oh, I mean AI). The reality of good investing is that while there might be hours or days or years of observation behind an investment decision, I have found you really need to do that work to understand there are probably only 3 critical variables that are visible and relevant to weight and consider. And at least 1 “unknown unknown.” For God’s sake, save the 39 pages, and give me the 3 variables to think about and I can do my own work. Word.
• There is a DNA strand embedded in the corporate American male that says, “I want to be the CEO of a public company.” Let’s not ponder the mysteries of the world too deeply, but I would simply note that it is EXCEEDINGLY difficult as an outsider being feted for the job to do the proper due diligence to understand just what it is you are walking into. And maybe it’s impossible. But I would simply note that every legacy employee has the incentive to BS you and the more quickly you can assemble your team, the better. And start with the CFO, who should be your partner in crime to evaluate the math of what you are being presented with in the first year. The CEO of a small company should expect to wear more than hats than desirable. The sooner you can shed hats to capable people, the happier “we” will all be.
• On a related note, in your first week…or before…call the 3 largest non-index shareholders and ask for a ten-minute company review. Guess what: we know stuff. And it may or may not be correlated with what you are being told by the official party line.