Acquisition Simulation

REVIEW SUMMARY
Businesses. METI, Sarasota; CAE Inc., Montreal
Industry. Health care, technology
Key. Finding an acquisition partner could be a long-term process that requires sensitivity.

The $130 million sale of one of Sarasota's most successful homegrown companies began with a stealthy phone call.

The president of the company, Mike Bernstein of Medical Education Technologies Inc., METI, called the head of the health care division at Montreal-based CAE Inc. in early summer 2010. CAE is a $1.63 billion firm with a focus in aviation simulators and training.

But Bernstein knew CAE wanted more from the lifelike human patient medical simulator business — METI's forte.

Bernstein spoke with the executive about how the two firms could partner on a potential business deal in the Middle East. METI could bring the product knowledge, and CAE could bring the training components. While the opportunity was legitimate, and potentially profitable, Bernstein admits he had an ulterior motive.

“The first call was more to make sure they knew who we were,” says Bernstein. “The first conversation was more code than direct.”

The code was the first signal sent out in a 14-month courtship that ended Aug. 24, when publicly traded CAE closed on the $130 million acquisition of METI. Founded in 1996, METI has been one of the 15 largest privately held companies in annual sales in Sarasota-Bradenton for the last five years. At the time of the deal, it had more than 200 employees, including 180 in Sarasota.

“The opportunity to acquire one of the few large leading players in health care education technology is a major leg up in the advancement of our strategy,” CAE President and CEO Marc Parent told Wall Street analysts in a conference call after the deal was announced.

That strategy is rapid growth.

The company got into the health care technology business, including simulators, two years ago, and has already grown the unit from $2 million in annual revenues to $38 million. Parent projects METI, in concert with CAE's other health care entities and its mining division, will surpass $120 million in Canadian dollars in annual revenues, and be profitable in fiscal 2013.

“METI,” says Parent, “is a premier organization.”

A onetime METI investor and non-executive board chairman, Bernstein thought that too. That's why he accepted a position as METI president in 2009.

Back then, METI's cofounder, Lou Oberndorf, had just led a $63 million debt and equity financed buyout of the company from its previous majority owner, L3 Communications. Chicago-based Baird Capital Partners backed Oberndorf in the buyout, and the private equity firm held about 55% of the firm after the deal.

Baird Capital officials and METI's board, which included Oberndorf, set a goal to cash out within three to five years. “We were too small a business to go public,” says Bernstein, “so we always knew we would be sold.”

Still, the sale came together faster than even an optimistic Bernstein believed. One advantage for METI: Bernstein had done similar deals before, where, as an executive with a smaller health care industry firm, he courted a larger acquisition partner.

Bernstein says CAE was an obvious candidate to buy METI. CAE, he says, is the de facto standard in the simulation industry and “is everything that a health care simulator could and should be.”

Building relationships
METI's new owners share that confidence in Bernstein. After the deal, the firm named him president of CAE Healthcare, which oversees METI and several other operations. Bernstein will be based out of Sarasota and report to CAE executives in Montreal.

Bernstein's promotion, says CAE executives, puts the division in a position to acquire other firms that can facilitate growth. Bernstein, who considers himself a transactional CEO, says while Baird approved some acquisitions, the deal making had a ceiling. That's because METI had to mind its balance sheet, given its desire to find a buyer.

Now Bernstein is the one in buy mode. “And,” he adds, “I have a bigger purse than I've ever had.”

The largest deal, however, was the one with CAE.

Bernstein approached that initial phone call to CAE in 2010 with both a bit of reserve and a bit of moxie. The firm had $55 million in annual revenues at the time, up 37.5% since $40 million in 2006, though a drop from $63 million in 2008.

“We were far from sale-ready. We hadn't seen enough growth,” Bernstein says. “But I thought we should have their attention.”

Nonetheless, Bernstein, with a reputation as a relaxed, yet direct, executive, was guarded with CAE. He wanted to build a relationship. But he also wanted to make sure he didn't give away too much about METI, or ask too much about CAE.

“The dance,” says Bernstein, “is the cultivation of a rapport.”

That call got things going. Bernstein soon spoke with and met Nick Leontidis, a CAE executive in strategy and business development. Bernstein calls Leontidis one of the best big-company dealmakers he ever worked with, a key player in the dance who was easy to work with and sensitive to the deal's progression.

Bernstein eventually visited CAE in Canada, and CAE executives, including Parent, the CEO, visited METI at its 76,000-sqaure-foot office in Sarasota, just east of Interstate 75.

But the relationship building part of the deal soon gave way to money.

Bernstein says an advantage in how he set METI's price was access to Baird Capital's research department, which helped create a detailed a valuation formula. Bernstein kept in regular contact with METI's board, too, so he knew the parameters of what numbers would work and what ones wouldn't work.

CAE's first offer came late last year. “It wasn't in the ballpark, says Bernstein, “although it made us feel good.”

The sides took a hiatus from negotiations after that offer. But it was back on by spring, and by June, says Bernstein, a deal began to come together.

'Human element'
The ultimate price, $130 million, is more than double METI's 2010 sales.

CAE executives, though, say the price reflects not only METI's future valuations, but the promise of the human patient simulator market. Parent says the global industry for simulation technology and training is worth more than $750 million a year, with customers from hospitals and nursing schools to governments and militaries.

“The acquisition of METI brings us much closer to fulfilling our vision in health care, which is to drive industry acceptance of simulation as the way to improve the way that doctors, nurses and other health care professionals are trained,” says Parent. “Our intent is to lead the industry by setting standards and gaining acceptance of simulation-based training as we've done in aviation over the past 60 years.”

The medical simulation industry standard, in several ways, has been set by METI over the last 15 years. Oberndorf, an Air Force pilot and Vietnam veteran, founded METI in 1996, after 25 years in the aerospace industry. The technology behind the products was invented and licensed by the University of Florida.

Bernstein, meanwhile, must balance the what's next of CAE with the what's now of METI, which will keep its distinctive name under CAE Healthcare. “The METI brand is very important to us,” says CAE spokeswoman Pascale Alpha.

Part of Bernstein's challenge is rumor control, to make sure employees have facts on the company's future. About 60 employees in duplicate positions were let go after the acquisition, including 20 from METI.

Bernstein says he has learned from past mergers and acquisitions that patience and prudence are allies. That, and executives must over-communicate, rather than leave decisions open to multiple interpretations. “It's a human element,” says Bernstein. “And you can't rush it.”

The good news, says Bernstein, is there are several new, long-term growth possibilities under CAE. For one, manufacturing work in CAE Healthcare will move from a plant in San Jose, Calif., to Sarasota. Even bigger, the deal opens new sales and product development lines, including CAE's surgical simulators and ultrasound simulators.

Indeed, Bernstein says the sales staff, about 40 people, could be the group most excited about the CAE acquisition. They now get to sell clients what Bernstein calls an end-to-end purchase.

Bernstein says he will deliver that message of optimism and confidence to the entire company. “I'm very bullish about this plant,” Bernstein says, “and our presence in Sarasota.”