Stanford's Course On Business Takeovers

Image: George Simhoni for Forbes

Rob Cherun (right) and Erik Mikkelsen became a two-man KKR on the outskirts of Toronto

Halfway through business school, Rob Cherun thought he was destined to work at McKinsey & Co. The elite consulting firm spent thousands to underwrite his tuition at Stanford a few years ago, certain that the wavy-haired Canadian would join right after graduation. But Cherun changed his mind. Even though a consulting career seemed safe and prestigious, he declared: “I wanted more volatility in my life.”

Today Cherun is holed up in a gritty industrial suburb of Toronto, running UCIT Online Security. It’s a small but fast-growing construction-surveillance company that Cherun bought soon after earning his MBA. If McKinsey stopped by, its consultants might snicker at the peeling paint in UCIT’s offices, the industrial-grade Coke machine in the hallway or the mud-splattered GMC Terrain in the parking lot. Cherun has jettisoned his old espresso-sipping habits, his Prada shoes and his convertible BMW. He’s now a salt-of-the-earth operator who favours Timberland boots, denim and a round of beers with the guys. But UCIT is growing fast. If its 32-year-old boss stays on track, his stake in the company could be worth $5 million or more in a few years—a target that young consultants can’t reach.

Cherun’s inspiration was a little-known but increasingly popular course at Stanford called ‘Strategy 543: Entrepreneurial Acquisition’. This second-year elective is a fast-paced, two-week primer on how to become a one-person version of KKR or Blackstone Group, carrying out your own tiny takeover and installing yourself as chief executive officer. This is a daring way to parachute into high-authority jobs in unpredictable locales.

Every year second-year Stanford students like Cherun stampede into S-543 to learn the essentials of raising money, finding an acquisition target and closing the deal. Instructors Peter Kelly and David Dodson—two longtime entrepreneurs and investors themselves—take only 40 students per session. Months before this autumn’s class began, every slot was claimed, and another 26 students hovered on the waiting list. Frustrated aspirants will get a second shot in the spring, thanks to a new scheduling expansion.

For 80 percent or more of enrollees, the notion of asking strangers across the continent, “Can I buy your company?” ends up being too freaky for their tastes. Some students treat the class as a means to surface investment targets, for others it’s armchair tourism. That’s fine, says Kelly. The world that he and Dodson describe is full of risks. It’s not for the faint-hearted. Every lecture or panel discussion is packed with warnings about failed searches, hideous operational snarls or companies that go bust.

Listen to Nick Mansour, who in the late 1990s thought he could get rich by taking control of Clear Creek Environmental, a liquid-waste-servicing company in Annapolis, Maryland. Determined to learn the business at its most basic level, Mansour early on decided to accompany a clean-up crew on a day’s errands. “We had a large truck, a bunch of hoses and some septic tanks to empty,” Mansour recalls. “How hard could this be? Well, I pushed a lever the wrong way. I got a bath—all across my overalls.” He couldn’t change clothes until the end of the day. The investment lingered much longer. After three years Mansour barely recouped the original money his investors had put in. There weren’t any profits to speak of.

Mansour returns regularly to Stanford to share his woes. No matter how challenging a picture he paints, some students are undeterred. “People say: ‘That’s not going to happen to me,’” he explains. “They’re optimists. Everyone has to be thinking that they’re going to be successful. Otherwise, why would you do this?” Mansour keeps chasing acquisitions and thinks his latest deal, taking over a health-related trade school in Arizona, has great promise.

Among the new optimists is Alex Stavros, a 2011 Stanford business school graduate who now runs CALO, a teen treatment centre in Lake Ozark, Missouri. “It’s the middle of nowhere,” Stavros cheerfully concedes. But he grew up as the son of missionaries in Peru and likes the idea of running a business with a big element of social service. Besides, he figures his general management skills can help the facility expand and be more efficient.

“You learn to hustle,” adds Abhijit Phanse, a 2008 Stanford business school graduate who now runs United Layer, a data-centre company nestled into a onetime Macy’s warehouse on the edge of San Francisco. Phanse came into the job with plenty of engineering and finance expertise. But he learned that he could add even more value to the company by mastering the art of sales, landing contracts with customers such as the city of San Francisco. “They don’t teach that at business school,” he says.

Business schools’ own data show how good—or bad—the deal-hunters’ destinies can be. Failure is common, according to an analysis of 150 alumni of Stanford and other leading MBA programmes going back as far as 1983, well before S-543 began. Slightly more than half the time, graduates either can’t find a deal or end up with a loss on what they do acquire. But a few dazzlingly successful deals—with 100-to-1 payoffs or bigger—create not just overall profitability but also an average annual return of 34 percent. Among the epic successes: Asurion, which provides lost-cellphone insurance to millions of customers, and ServiceSource, which handles so many software renewals for tech giants that it has become a publicly traded company in its own right.

An alum of Stanford business school, Abhijit Phanse honed his sales talents on the job as CEO of datacentre company United Layer

For Cherun, everything he heard in business school about the acquisition hunt sounded magical. Unable to win one of the 40 official spots in S-543 during the fall of 2010—his final year at Stanford business school—he implored class organisers to let him do something useful, like arranging guest speaker luncheons. Who could say no? Before long the interloper with the lunches had wiggled his way into a few sessions.

Raising money to pursue acquisitions was easy, Cherun found. Four Stanford instructors—including Joel Peterson, chairman of JetBlue Airways—volunteered to back him. That helped attract specialty investors such as Search Fund Partners in Menlo Park, California, which backs dozens of business school graduates in their deal quests. With Canadian connections rounding out the roster, Cherun and a buddy, Erik Mikkelsen, raised more than $500,000 to cover two years of acquisition hunting. The young searchers also won assurances that they could tap the same investor group for millions more to finance an actual purchase.

Deciding what to buy was harder. Stanford teaches students to look for growing businesses in simple industries that require little capital spending. Being able to buy these outfits at six times Ebitda (earnings before interest, taxes, depreciation and amortisation) is considered good, too. But the standard advice is to be willing to consider any industry anywhere that might pass those tests. “So we were really interested in fish farming at first,” Cherun recalls. He hung out at Chinatown markets in Oakland, trying to learn about the sturgeon trade, before realising that it could take years to make fish ponds pay off. A few weeks later cellphone kiosks caught his eye. Then, when an accountant advised that UCIT might be for sale, Cherun and Mikkelsen realised their quest might be complete.

UCIT provided round-the-clock camera surveillance of construction sites, using the internet to beam images into a control room at the company’s headquarters in Mississauga, Ontario. If rogues slipped onto a construction site at 1 am to grab copper piping, plywood or equipment, signs of mischief would instantly be visible at UCIT. (The name is a play on words: You see it. Get it?) Police could be on the scene in four to ten minutes.

This, Cherun decided, was a business that passed all of Stanford’s tests. It also sounded a lot more palatable than some of his predecessors’ picks. As Cherun later put it: “Who really wants to be the septic king of Canada?” Best of all, UCIT’s founder and owner, Sidney Sommer, was ready for a change in control. Sommer, 35 at the time, had been running UCIT for eight years. He knew the business was ready to open more sales offices across Canada. But he had a wife and two toddlers, so his ability to travel was constricted. “I couldn’t do it all—and still have a successful marriage,” Sommer says.

The solution: Let Cherun, Mikkelsen and their investors buy about 90 percent of the company. Sommer kept 10 percent of the business, ran the Toronto area sales team and remained a director. The seller and buyer found their rhythm early on and struck a deal. Sommer later joked to the two young suitors that his first thought upon meeting them was: “I see the real investors sent their children to see me.”

Running a small company, Cherun says, is “so real!” The hands-on immediacy of his new job hit home early when he pointed to a burnt-out lightbulb in the ceiling and asked: “What are we going to do about it?” The answer: If it bothered Cherun, he could get a new bulb and install it himself. So he did. Some days he stays in the office until 1 am, overseeing a team fixing a software bug that hurts monitoring-room performance. Early on, Cherun’s daily duties included toting about $15,000 of customers’ cheques to the bank. Now a staffer shuttles the money—and peak days can reach $275,000.

UCIT is on track this year to book a bit more than $10 million of revenue, double the company’s size when he and Mikkelsen took over. A new office in Vancouver is humming after some early stumbles; a Calgary rollout has been under way for a year. Profit margins have shrunk slightly as UCIT invests for growth, but software upgrades are boosting human operators’ ability to monitor many cameras at once, helping overall efficiency.

Thrift has become a way of life. Cherun cuts down on hotel costs when he travels, couch surfing at friends’ places instead. Mikkelsen rents beat-up vans on his business trips for as little as $20 a day, avoiding costlier new cars. “We think a lot about opportunity costs,” Mikkelsen says. “If we don’t spend $300 on a trip, that’s $300 that can go into a nice dinner with customers or an extra bit of marketing at a trade show—all of which can win us new business. And the value of that new business can be way more than $300.”

Turning his back on the McKinsey job has carried a short-term cost for Cherun. He had to repay his tuition subsidy within 90 days of graduation. More recently he was about to board a fight in Vancouver when he noticed a former pal from his McKinsey days getting on the same plane. “We walked through the entryway together,” Cherun recalls, “and then he headed left into first class. I headed right into economy. It was hilarious! I couldn’t help but think: ‘That could have been me.’ ”

Cherun’s obligations to UCIT may keep him flying coach for a bit longer. But he knows that successful entrepreneurs eventually get to buy their own jets—or airlines. That’s a leap that consultants rarely make.