NCB Management Services ESOP Transaction Recognized as a Top Deal of 2015; A Model Other ARM Firms May Want to Explore

NCB Management Services, Inc. (NCB) was recently recognized at the 14th Annual M&A Advisor Awards Gala. The event, produced by The M&A Advisor, honors those professionals whose activities set the standard for M&A transactions. This year, over 280 nominees representing more than 690 companies became finalists. An independent judging committee of 25 top M&A industry experts determined the ultimate recipients, which were revealed “Academy-Award style” at the gala.

NCB was recognized in the category of Financial Services Deal of the Year (from $10MM to $100MM).

Competition for the award was significant. Other transactions that were considered included the Sale of Columbus Data Services to Cardtronics, the C.A. Bancorp Strategic Merger with Crosswinds, Federated National and Transatlantic to create Monarch National, the acquisition of Trade Processing Business of Wilmington Trust, the sale of Phoenix Payment Systems (EPX) to North American Bankcard, Aquiline Capital’s Investment in Virtus Partners, the acquisition of Rivet Software by Equity Administration Solutions (EASi), and the financing of ChromeRiver led by Great Hill Partners.

The transaction involved the creation of an Employee Stock Ownership Plan (ESOP) to “acquire” stock of the company. ESOP is a term that is often seen and/or used incorrectly.  An ESOP is a kind of employee benefit plan, similar in some ways to a profit-sharing plan. In an ESOP, a company sets up a trust fund, into which it contributes new shares of its own stock or cash to buy existing shares. Alternatively, the ESOP can borrow money to buy new or existing shares, with the company making cash contributions to the plan to enable it to repay the loan.

ESOPs are most commonly used to provide a market for the shares of successful closely-held companies, to motivate and reward employees, or to take advantage of incentives to borrow money for acquiring new assets in pretax dollars.

insideARM originally reported on this transaction on February 5, 2015.

insideARM Perspective

This is a nice story for the ARM industry. As noted above, competition was stiff. This type of transaction is a positive news for the ARM sector and should be reviewed by other owners.

First, it shows there are liquidity alternatives available to owners of business in the ARM space. CSG Partners represented NCB in the transaction. Stephen J. Berman, Managing Director at CSG commented, “For business owners in the ARM industry seeking liquidity, an ESOP can serve as an excellent alternative to a traditional sale. It creates a buyer for the business that is willing to pay a price that reflects the full value for all of the company’s business lines without compromising the jobs or livelihoods of the employees.”

Berman noted that ESOPs also pose many tax and financial benefits to ARM companies, “An ESOP can allow for selling owners to gain liquidity and defer capital gains taxes on proceeds from the sale, without giving up control of their business. When structured properly, the company itself can substantially reduce its tax liability; often becoming a tax-free entity through the ESOP.”

Lastly, Berman pointed out that the ESOP is an excellent recruiting/retention tool and an employee benefit. “The company gets a talent attraction and retention tool, and employees of the business benefit by gaining a meaningful retirement account through participation in the ESOP.”

NCB is a highly regarded mid-sized firm that is both a traditional third-party agency and a debt buyer. In an industry with no shortage of gloom and doom, it is good to see positive news every now and then. From a broader perspective, it is also good to see that NCB was able to obtain the financing to complete this transaction. Consummation of the deal bodes well for other transactions in this space.

Marcelo Aita, President and CEO of NCB reflected on the complexity and time involved in the transaction and the positive end result:

“Going the ESOP route is not a quick and easy process. It is no less demanding and taxing on the company’s management team than a sale to a private equity firm, particularly if the transaction is leveraged with debt. NCB’s business was examined in detail through a due diligence and underwriting process involving teams of professionals from every stakeholder over a period of many months.

But, at the end of the day the ESOP can be a huge long-term windfall for all of our existing employees, and any new employees who join us in the next few years. Unlike a typical 401K retirement plan, this program is fully funded and paid for by the company. Our employees didn’t spend or invest any of their own money to participate in the ESOP. And while the value of our NCB stock will fluctuate with time, as with any other company, every employee now has the opportunity to reap the rewards of any future success we create as a team.”