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Employee-led buyout could signal new trend

January 1, 2001

Times-Dispatch Staff Writer

When Renaissance Worldwide Inc. started rolling up companies a few years back, a small but fast-growing Richmond firm called The McClain Group turned up in the trawlnet.

Renaissance, then operating under a different name, paid the McClain founders $15 million in 1997 for their IT consulting company. It shuffled out the requisite stock options to executives and employees.

The outlook energized, the market soared. But it didn’t last.

Renaissance options eventually sank below the water line as investors commenced daily floggings of technology companies. Once at $30, Renaissance shares fell below $1 last winter. Nasdaq warned of a delisting.

In Richmond, executives of the former McClain Group – folded into a Renaissance unit called Align360 – set up a Feb. 9 conference call for employees in town and those scattered at client sites.

Trae Jones, Align360′s vice president of human resources, delivered the news.

“That’s when everybody broke out,” he said.

Including the company itself.

Bucking the trend of mergers and consolidations, Align360 pulled off an employee-led buyout of the unit. The employees found a willing seller in Renaissance Worldwide, which is anxious to show investors it’s focusing more sharply.

The deal could be an early indicator of what’s ahead in the technology sector, where misery hardly discriminates between profitable public firms and money-losers.

The sector is ripe for management buyouts, says William S. Joys, director of technology banking at Dominion Partners LC, a Richmond investment banking firm. Dominion advised Align360 and arranged bank financing for the deal.

Dominion Partners is helping two other regional companies negotiate management buyouts, though Joys would not name the firms.

“We see an opportunity to take back from the public markets anything that is improperly valued,” he said.

Leslie Grandis, a partner at the Richmond law firm McGuireWoods, said the potential is strong for more management buyouts and leveraged buyouts. One reason is market conditions, which pressure public companies to protect valuations.

Like Renaissance, a company may concentrate on core business.

“Those companies also have lost the ability to raise money, so they have to find ways to narrow the focus and sell off pieces of the business to raise capital,” Grandis said.

Joys said market conditions should produce some bargains for those interested in buying back all or parts of public companies. Align360 is one example.

McClain Group had 22 employees and annual revenue of $3.5 million when it sold for $15 million to Renaissance’s precursor, The Registry Inc., in 1997.

Align360′s executives and employees bought the firm back last week for $5 million. The company now has about 80 employees and reports $10.5 million in revenue for 2000, with an operating income of $2 million.

Renaissance Worldwide retains a 25 percent stake in Align360. Employees own 20 percent.

Align360 consultant Raegan Williams clearly is pleased to shift from owning empty stock options to owning a tangible part of the now-independent company.

She said the tech sector’s overall malaise never worried her, even if friends would joke, “Oh, your stock price is in the hole.”

“We almost always acted as an autonomous business within Renaissance,” Williams said. “At the end of the day, it’s not the stock options, it’s the quality of work that you do and the way you are treated.”

Align360′s management emphasizes that autonomy to employees and recruits, reminding them that, while a small part of Renaissance, the business unit earns profits and promotes a distinct culture.

“We really tried hard to draw the dichotomy between Align360 and Renaissance Worldwide, particularly in the past six months,” Jones said.

Though frustrated as their own Renaissance stock options basically dissolved, Align360 executives say they don’t regret their decisions.

“It certainly didn’t materialize the way we expected,” said company President David Gleberman. “I don’t think any of us spend much time looking backward.”

Chief executive Michael Mendelson said the experience reminds Align360 management that the firm should remain focused on what it does well.

“We’re not working with the trendy technologies,” he said. “It’s core technologies that [businesses] can’t get away with not doing.”

Align360 evaluates a company’s operations, then helps the client develop and carry out plans to implement new systems or technologies designed to increase efficiency.

It begins its second run as an independent company with the largest backlog of work in the group’s 10-year history, Mendelson said. He expects Align360 to continue as a private firm, and projects income growth of about 40 percent this year.

He and his new co-owner employees stand to gain plenty if they meet their goals.

“They’ve always felt a real sense of ownership,” he said of the employees, “now they have the paper to prove it.”

Copyright (c) 2001, Richmond Newspapers, Inc.

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