Charterhouse Achieves High Multiple With Quick Turnaround

Target: Lason Inc.

Price: More than $120 million

Sponsor: HandsOn Venture

Seller: Charterhouse Group

Financial Advisor: Banc of America Securities

Legal Counsel: Proskauer Rose

Back in 2004, with the prospect of insolvency looming, Lason Inc. looked to all the world like a dud. Its executives charged with fraud and its balance sheet loaded with debt, the company was passed over by other buyers. New York buyout shop Charterhouse Group decided to buy it anyway.

Last month, following a 30-month overhaul, Charterhouse was repaid handsomely for its risk. It sold the Troy, Mich.-based provider of business process outsourcing services for more than $120 million, netting 5x its original investment.

Rewind to the go-go 1990s, where Lason went on an acquisition binge, snapping up 76 firms. Its publicly traded stock rocketed skyward as the company branched out into Europe and Asia. Its fall would be just as spectacular. Even as Lason’s market capitalization approached $1 billion in 1999, the shopping spree piled on $320 million in debt. By the end of 2001, the company cratered under the weight, defaulted on loans and entered Chapter 11. What’s more, three former executives were charged by the Securities and Exchange Commission in 2003 with cooking the books, and the company was forced into settling a shareholder lawsuit over the steep drop in stock value.

By the time Charterhouse took the company private in 2004 following nearly two years of due diligence spread over three auctions, Lason cost less than $30 million to buy. In its final regulatory filing before going private, Lason reported a loss of $589,000 on sales of $70.3 million. It was still operating under a crushing load of debt that yet again threatened bankruptcy. Clients, sensing danger, had fled.

But Chris Garcia, a Charterhouse principal with a background in BPO services, said he was convinced Lason still had value “even though the trend lines [didn’t] look too good.” The problem was that management was too busy making debt payments to execute a business plan. Moreover, “I fundamentally believe in outsourcing,” said Garcia, who became the company’s chairman.

When Charterhouse bought Lason, the buyout firm purposely used an equity-heavy structure so customers wouldn’t hear that, once again, the company had been levered up, Garcia said. Charterhouse further reduced the debt load through a recapitalization. With Lason on firmer footing, customers began to return.

Working with existing management, Charterhouse drafted a two-year turnaround plan that prodded Lason into expanding its menu of services. “We didn’t fire one person or bring in a new team, and it did worse before it did better,” Garcia said.

Within two years, Lason’s profits tripled. Charterhouse had initially expected to hold Lason for at least five years, but the frothy sellers’ market and interest from a number of buyers spurred Charterhouse to retain Bank of America to run an auction. David Hoffman, a Charterhouse partner, said the firm didn’t go with the highest offer. Instead it selected HandsOn Ventures, a Santa Monica, Calif.-based buyout firm that promised to keep management in place and not fire any employees.

The Lason deal was the third investment and first realization for Charterhouse Partners IV, a vintage 2003, $450 million fund.—J.H.