Fixing Broken Companies Through Smart Deals with Marc Bell

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0:58I'm Kisan Patel, and you're listening to M &A Science, where we talk with deal professionals and learn valuable lessons from their experience. This podcast focuses on stories, strategies, and what actually happened during M &A deals.

1:22Hello and welcome to the M &A Science Podcast. This podcast is part of a mission to rethink how M &A is done. The old school seller-led approach, it's dead. Fire Lead M &A is all about strategy, alignment, and efficiency, putting value creation at the center of every deal. Let's be real. It's not just about closing the deal. It's about making it successful. We uncover what truly works at M &A by learning directly from the best. I'm your host, Kisan Patel, founder and CEO at Deal Room and chief scientist at M &A Science. I'm joined by Mark Bell, a self-described deal junkie whose career spans everything from newspapers and watches to satellites and data centers.

2:05He's taken 17 companies public, executed countless acquisitions, and built businesses across the globe. Mark brings a mix of grit, strategy, and creativity to M &A. He's not afraid to get his hands dirty in a turnaround. Today, we're going to dive into what it really takes to fix broken companies, how to structure deals using leverage and seller financing, and the principles that guide leadership and success. Mark, how are you doing? I'm doing great. And thank you for having me today. Hey, thanks for making a stop to our M &A Science Studio hosted by VRC. If you're not familiar with them, valuation research company.

2:40I won't go anywhere else for valuation work. Can we kick things off a little bit about your background? Sure. How far background do you want to go? The entrepreneurial journey and like when M &A first got introduced to it. So my background is a little off the beaten path. I read to others. Out of grad school, I started a company called Globix, which stood for the Global Internet Exchange. That was in December of 1989. Over the next decade, we grew it into the world's largest logical pier, meaning we had 28 ,000 miles of fiber around the world, and we connected to more networks than anybody else.

3:11We became the second largest owner of internet data centers in the world. We had people like Walmart, Microsoft, and many others as our initial hosting clients in the mid-90s. And we went from just providing internet access to eventually web hosting, to eventually co-location, and then application development. What do you do when you get on the internet? Everything from video streaming to e-commerce. Decided to sell in March of 2000. I was having kids and decided to sell right before my kids were born. And after that, I moved to Florida, set up a family home office. We started trading bonds. One of the positions we held was a position in a company called General Media, which most people have never heard of.

3:50This was back in 2004, 2003, 2004. General Media was a company that owned Penthouse Magazine. And a guy named Bobby Cuccione, they were in bankruptcy. So we believed there was a lot of value there. We went through the process. Originally, we were just trading the bonds. We bought them at pennies on the dollar, expect to get paid off the confirmation. Cuccione tried to decide he was going to try to cram down the dip loan, whether that means debt or in possession financing. You can't really do that in a bankruptcy court. He found that out the hard way. We ended up foreclosing on the magazine. Next thing you know, we own a magazine with 30 million dollars revenue, losing$5 million a year.

4:25We tried to flip it. Nobody wanted to buy it. But we did learn a lot. At 9 a.m. on day one, we had about 200 employees. By 5 p.m. on day one, we had 50 employees. The business still hum. We realized because we spent a year diving into the business while we own the bonds, understand what they were doing right and what they were doing wrong. And this was a classic turnaround. Fast forward a decade later, we had done about$500 plus million of acquisitions, put it into it, renamed the company FriendFinder Networks. We started a cable television network from scratch. We were in 330 million homes worldwide.

4:57Our websites had 700 million active users worldwide. And we were the fifth largest owner of email addresses in the world, besides Yahoo, Microsoft, Facebook, and Google. We took the company to about 350 million of revenue with 115 million of EBITDA. And then we ended up selling it to a hedge fund. So it was a very exciting journey. And while we were doing that, my partner and I did a SPAC called Enterprise Acquisition. In 2007, we had a market. It was a$250 million SPAC. The market collapsed in 2009, where everybody wanted their money back because that's how SPACs worked back then. So basically, we had a shell with$25 million in it.

5:31We turned it into what I believe is the world's first externally managed mortgage REIT. And with that, we started a company which is today called Armour Residential REIT, which has over$15 billion of assets on the New York Stock Exchange. and it owns basically Fannie, Freddie, and Ginny mortgages. And that's what we did. We realized there was a massive displacement in the mortgage marketplace when the market collapsed. And loans that were, the principal was guaranteed by the full faith and credit of the US government for trading way below par. We thought it was an opportune time to pick up yield and acquire some assets.

6:03And that company still exists today. Then a few years later, a friend of mine asked me if I wanted to go produce a Broadway show. I said, no. And if I really wanted to produce a Broadway show, I said, really, no. and I go, I'll do it on two conditions. One, I won a Tony Award and two, I make money. And the joke on Broadway is, how do you make a small fortune on Broadway? You start with a big one. And our first show on Broadway was a show called Jersey Boys. And it was a$12 million investment. We sold$1.6 billion of tickets worldwide. I won a Tony Award. The show won a Grammy Award. We got a gold record, a platinum record.

6:36And then my partner's asked me and wanted to do a play. And I'm like, and I'll be honest, I'm a big fan of Broadway. But okay, so we did a play called August Osage County. It won a Pulitzer Prize. I won my second Tony Award. And then we made a movie with Jersey Boys. Clint Eastwood directed it. We made a movie with August Osage County and Meryl Streep starred in it. And then we just kept going. We did Rock of Ages, which was awesome. This time we made a movie with Tom Cruise, and that was a lot of fun. And I got a chance to be in the movie. That was a real lot of fun. And nobody could recognize me.

7:04I had a long red hair and an arsenal. So I was a groupie, but it was fun. At the end of the day, we probably sold over $3 billion of tickets on Broadway worldwide. Broadway, the roadshows, and stuff around the world. And then we started investing in hospitality. We invested in a restaurant in New York called Lavo, called Catch, a nightclub called Avenue, a pizza chain called Art and Trick with Still Pizza. We did Bongos in Miami, Flute Chow in Miami, and numerous other restaurants just because we didn't like waiting for tables. So it seemed like a good idea. But we got very lucky. We had great partners.

7:33So we were very blessed. We were really good operators who helped work with us. We bought a small company called Tyvac, which I invented the CubeSat, Turned that into Terran Orbital and recently sold that to Lock and Martin. And now we're looking for what's next. Keep going. Yeah. No one in sight. No one in sight. Are you the definition of an opportunistic investor? I like to think of myself as a serial entrepreneur, but I also try to be smart in how we operate our businesses. So a great example was I was building data centers in New York City. We were able to do New York City and London and California.

8:06and I went and I decided you have to own your own real estate. You spent a lot of money putting a data center in. So we were acquiring a building on the 415 Greenwich Street in New York. I forgot the gentleman's name who sold it to me. Super nice guy. And we paid$25 million for the building. And we're talking back 25 years ago, but it's a whole city block. And it tells me how super nice guy was probably my early 30s. And he comes up to his office after the closing. And he goes, Mark, I feel bad for you. You overpaid by about$5 million for the building. And it was only worth like 20. So I want to take you under my arm.

8:40And I want to teach you about real estate in New York and how I can help you do better. And I go, sir, I really appreciate your offer. It was very kind to you. I paid$25 million because there were$18 million of historical tax credits on the building, which I sold to Chevron the next day after closing. So I really only paid$7 million for your building. And he goes, what historical tax credits? the ones that date back 50 years that were just nobody you didn't have for whatever reason you didn't take them he goes huh but if you like i'll take you under my wing and teach you about real estate in new york city it was very funny so that was an opportunity and we continue to look for opportunities when we buy real estate we look for real estate that has clauses and stuff that date back long before most people were born that work on the projects we're very lucky to keep finding real estate around the country that is unique and that we can buy for a significant discount.

9:32It's still opportunistic. I guess it's opportunistic. It's entrepreneurial. I'm curious to this. It's not like earlier in your journey, you built a business from scratch. Now, if you look at things, it sounds like you're more of a theme of finding things that you can be creative and reposition or something unique. Well, no, no. Now I'm looking for building more businesses from scratch. So we built a broker-dealer for scratch at Armour Capital called Buckler, which has done phenomenally well. We're looking now at other things that we could build to scratch. We've been looking at trying to build an SMR, small modular reactor business.

10:01All these data centers around the country are probably up, but they need power. With AI and the mass amount of data processing that's needed, there's just not enough electricity. And small modular reactors could be a very cost-effective way to do it. We're looking at how we can produce these in mass production. Not just producing these as one-offs, producing these as a mass production. We're also looking at currently starting our first fund. We've never had a fund. We're 57 years old. It's not too late to do something new in life. So we're starting a national security fund with an AI focus, really focusing on acquiring, investing in companies that serve the national security of this country, using AI to achieve that mission.

10:37We'll be going on the road with that soon, and we're pretty excited about it. This is not a solicitation offer, by the way. We're looking at other companies that we could acquire and do turnarounds as well. We keep finding interesting things and interesting businesses that could use help. That's what I was curious about. they're sort of like building from scratch. I think you were spot on in terms of there's a significant market opportunity and there's nothing that exists, which builds your case to build versus the flip side of buy. Like what sort of drives you to really get something that catches your eye that makes it worth buying?

11:07It has to be something either I like, I enjoy. I don't want to do it just for the sake of making money. That's just something. So I got my master's degree in real estate and development investment from NYU. So I love real estate, love building things. Always loved building things as a kid. So building stuff is fun. But it has to be a business that I feel like I could really get my arms around and really not only understand, but something I'd be like, wow, that's fun. So for example, I purchased a company called Kibu. It was a Dutch watch manufacturer. They had two stores, one in The Hague, one in Central Bay.

11:37They made a great huge 55 millimeter watch in a lot of colors. They were going bust and I loved it. So I decided to acquire the company. And over the next few years, we went from two stores and we were in 6 ,000 retail stores worldwide. and we sold two and a half million watches. We were on the main runway of New York Fashion Week. We were having a blast and then unfortunately COVID happened and the watch company unfortunately did not survive. But we learned lessons. Avoid plagues. Manufacture stuff locally in America. We learned a lot of lessons there, but it was a lot of fun while we were doing it.

12:07Like what's the, teach me that. Like how do you even spot these kind of turnaround opportunities? What's your approach to diligence again and you're avoiding a trap of catching a falling knife just keep falling? A lot of stuff just falls in our laps. General media fell in our laps because Bob Guccione was one of Globix's first customers. So he called us asking for help in the bankruptcy. So we said we would help. And we said that way he would get his magazine back. And in the end, he turned against us. And that's how we ended up owning it. We never had any intentions of owning it. We were just trading bonds.

12:38And so that kind of fell in our laps. With the watch company, it was more of, I don't want them going out of business. I loved wearing the watches. All my friends were like, wow, that's so cool. They've had hundreds of different colors. It was just fun. It cost us very little money to buy it. And it cost us some money to turn it around. It was on a great trajectory until COVID, unfortunately. And then other things we saw from scratch. We just got ideas and we build it and we just fall into things. Opportunities multiply or are seized. You sort of get this reputation and people are like, you should go call Mark.

13:09Maybe you can... You'd be surprised. People call me all the time. And sometimes I'm like, oh my God, that's so cool. I got a call once from a venture capital firm that was investing in a disappearing tattoo company in Canada. Their fund structure, they realized, would prohibit them from doing a Canadian investment. So they called me up. I'm not a fan of tattoos. I admit it. They asked me if I would be willing to take over their commitment to invest. And I go, hell yeah, because it solves a problem. Tattoos that disappear. I like that. Went and invested in this company and Neil tried to help them grow and we grew it.

13:38And eventually I sold it. I sold out. And it was just a great example. It was a young entrepreneur. I was able to work with him to give him ideas on how to grow and he grew. It's a great product. You mentioned you haven't done a structured fund. How do you think about capital structure? You always want to be the senior secured lender at the end of the day. And go from there, you want to be the top of the cap table whenever possible. But that said, you try to layer it. We always do equity, then we do furs, then we do debt. We always try to layer in all the different parts of a cap table that make sense.

14:05It depends on the business. Yeah, that's true. I'm just wondering, what is your alternative structure? What are your levers that you're pulling on? And I'm trying to get your lessons over time of like, hey, here's what I learned. If it's going to be a new startup from scratch versus buying something that's a turnaround situation, what is sort of the way you would architect the capital structure? One, we never want to work for the lenders. In other words, you want to make sure you're only borrowing what you can afford. If you're not even positive, you don't have free cash flow, you better have a plan on how you're going to get there.

14:33Because then the lenders will own the business. Two, we never like to work for the landlord. So we always want to own the real estate where we are. So we try very hard when we're growing businesses to own the real estate when possible. We believe owning the real estate is key because eventually you pay off your mortgage and your rent becomes cheap. You look at New York City, but your friends are still sky high, even though half the city seems to be vacant. But San Francisco is getting, you're seeing now a massive change where buildings are selling for 30 cents on the dollar, 40 cents on the dollar, because nobody wants to be in San Francisco.

15:01And people are getting great buys buying amazing buildings for very little money. We always joke the second owner of a restaurant always makes money. The first owner spends too much building out the restaurant. And then when the landlord relates it to the second owner, all the kitchen's already built out and everything's already there. And it's turnkey. You got to right size the value of it and then optimize the operations. And it's a lot easier to fix something versus build something. Sometimes. It depends what you're doing. You're right. You're right. If a business is cash flow, that's always a good thing to leverage, but it's got to be serviceable.

15:32How does an entrepreneur spell happiness? Positive cash flow. I like that. I learned that from an undergraduate. I went to Babson College and they teach you that the first week in school. That's an orientation event. What about businesses that aren't cash flowing? What is your view on how do you structure those deals? That's harder. They're not cash flowing. We try as I get older, I get more risk adverse. When I was younger, absolutely. I would jump on in. We'll try to figure it out. Now at 57 years old, yeah, I'm much more guaranteed, much more secure, much more conservative human. I try to take less risks.

16:03I'm trying to wrap my head around this. I play in software. And one, I don't think I'm going to do another thing from scratch again. I'm like, done with that. But buying, fixing things, sure. Those are interesting. When I look at opportunities for us to acquire other businesses, they're adjacent or in the same field in software. And they're not making money. And they don't have growth. But they still have really high value expectations. And it teaches me how do you bridge the bid-ask spread to help the seller rationalize the valuation expectations. And then the other part is even just structuring those deals because it's stuff you really don't want to put debt on.

16:35It's funny. I meet lots of people, lots of entrepreneurs all the time. I used to do a lot of venture investing. I always hear the expression, I'm building a company to take it public. That's the one I've heard the most. Then I remind them that there's a one in 3.2 million chance of their company going public. And there's a one in 770 ,000 chance of them getting struck by lightning. So I say, go home, get struck by lightning, come back. Because that's not how you start a business. They're not starting a business knowing what your exit's going to be in day one. And what is it? 168 companies went public last year.

17:05That's it. 200 so many companies are going to go public this year, maybe. But yes, there are millions and millions of companies all over the country. People have very unrealistic expectations. And it's unfortunate because I see a lot of businesses fail. 80 % of all new businesses fail within the first year. And it's two years, two to five, another 80 % will fail. And what's left, 50 % will fail. So very few succeed. And a lot of it, unfortunately, is because of, I don't know if the word is hubris, I don't know what the right word is, of founders who just believe their thing is the best, it's the most awesome thing in the world, and they're worth the most amount of money.

17:38And they end up getting nothing at the end of the day. And that's unfortunate because they probably could have been good businesses if they were realistic in what they had, realistic in what the value was, and they could have raised capital. Being realistic with yourself is key. We never kid ourselves. I can see that. This is the cliche thing that you raise too much money at a too high of a valuation. You don't make up the metrics that get the return back on that valuation and then you're underwater and then you're in trouble. Yeah. As you get older, you get more conservative and you're realistic about how things go.

18:08Set your expectations properly. So we go into a business now and we set very low expectations. It's like Scotty from Star Trek. We always want to set low expectations and exceed them. I totally agree. Feels better. Sleep better at night. Sleep much better at night. How do you do that? I feel like we're in this environment where now we got all the AIs trending and you look at the valuation on those companies. You thought we corrected ourselves after 21, but no, it's like swinging back the other way again. Being first doesn't mean you're the best, doesn't mean you're the winner. If that were the case, MySpace would have been a winner.

18:38Lycos would have been a winner. There's a long list of people that had the right idea early, but didn't become a winner. Later on, people came later on were the winners. AI, quantum computing, there are going to be winners and there are going to be a lot of losers. Nobody knows who's going to be who. Yeah, that's a fair point. In terms of like managing risk, to keep out of that sort of realm of overvaluation, keeping it like we talked about, just real achievable. How do you discipline yourself to do that? Is it just all the numbers and saying, all right, we have a high level of confidence, we can hit this.

19:07Is that what it is or is there more to it? We look at the numbers. We also believe you've been on the jockey, not on the horse. So we look at who the operators are. Some people are very smart and smart doesn't necessarily mean you have your PhD. They can be street smart. They can be other kinds of smart. We look at their backgrounds, their track records. I met a young man the other day who I just hired, who's 32 years old, and I believe he will do great things. He's got to get comfortable with making decisions and getting comfortable with risk. But you meet someone, you have to be a good judge of character.

19:36So you feel like who's going to be the jockeys of the future. And he'll be a great jockey 10 years from now. Tell me more. What makes a good jockey? People who are realistic, people who ask great questions. So I love when people ask questions. Because if they ask smart questions, that means they really thought about it. Ask thoughtful questions. You know, people just like to speak and pump up themselves. But you notice that when you meet people and they ask lots of questions, you have to learn about them by the questions they're asking you. So whenever I interview somebody, I like when they ask a lot of questions.

20:04And the more sophisticated questions, the more detailed questions, I like that. And I'll push back. And I'll see how they take it. Because I want them to feel self-confidence. And I want for them to argue back. What's their point? But it can be in any range of even doesn't have to be issues related to the job. It could be about politics. It could be about, we had a great banter with people the other day over the Trump administration and Harvard and docking them$8 billion for Harvard, the way they treated Jews during the anti-Semitic things. And you know what? It's great that the administration is focusing on anti-Semitism, as a Jew focusing on anti-Semitism.

20:37I think schools like Columbia should be punished, don't get me wrong. But I also think the research, especially the medical research like Harvard does, that shouldn't be punished. They should punish them in appropriate ways. But I do think punishing them makes a statement. But the cutting out medical research that helps the entire nation probably isn't what we'll want to see because that also creates innovation and that creates other things. There's a balance between it all. And there's a balance on how you do things. I like this. So vetting out the best jockey, it's like seeing how the questions are asking, asking some smart questions.