Managing Director with Black Investment Firm Madison Street Capital Shows How Mergers & Acquisitions Can Be a Pathway to Building Black Wealth

Walter Whitehead always knew the value of a dollar.

He recalls listening to adults talk about money when he was a child growing up in South Central Los Angeles. Their fixation piqued his interest and signaled to him how important it was to have.

It was a fascination that began early. Spurred by that curiosity, Whitehead unwittingly began studying finance long before he could drive, shave or even work.

Walter J. Whitehead, Managing Director at Madison Street Capital. (WW’s LinkedIn)

When he was 9, Whitehead checked out a book called the “Ultimate Credit Handbook” from the public library in his Inglewood neighborhood. The book taught Whitehead the ins and outs of the three major credit bureaus: Experian, Equifax and Transunion.

He also learned the culture of money.

“It was always just apparent to me from a very young age that money is very important,” he said. “So naturally I was just drawn to finance.”

That natural inclination catapulted Whitehead, 35, toward starting his own investment banking firm less than two years out of college. He’s now a financial adviser who lends his expertise to businesses looking to close merger and acquisition deals.

It’s all part of his lifelong dream to improve the financial literacy of African-American communities to help shrink the racial wealth gap.

“I’ve always wanted to help shape, improve and evolve the habits of my community. I want their values to shift from looking rich to being wealthy,” he told Atlanta Black Star during a recent interview.

Mergers and acquisitions are a pair of intertwined business transactions that have been around for centuries. Simply put, a merger is two businesses consolidating ownership, while an acquisition is one company absorbing another into its fold.

When most people hear the terms, they think of billion-dollar deals involving mega-corporations like Exxon and Mobil merging in 1999 or Disney swallowing up 21st Century Fox two decades later.

But those are high-profile deals at the top levels of industry. Whitehead said M&As are far more common in the “middle market,” a large segment of industry carved out for businesses that gross between $10 million and $1 billion annually.

Middle market businesses powered the economy before the pandemic. They accounted for 30 million jobs and more than $10 trillion in revenue, representing about a third of the nation’s private sector GDP, according to Investopedia.

That’s the wheelhouse in which Whitehead operates as a managing director at Madison Street Capital, a Black-owned boutique investment banking firm. He brokers merger and acquisition deals and helps business owners raise capital.

M&As can prove extremely lucrative and represent a relatively untapped pathway to success, particularly in the African-American community. According to Forbes magazine, the average acquisition netted buyers a company worth $1.5 billion in the second quarter of 2020. Yet, there is a shortage of Black businessmen and women buying up other businesses. Black-owned firms are often the ones being acquired.

There have been some success stories. Black business mogul Byron Allen’s company, Entertainment Studios, acquired The Weather Channel from Comcast in 2018. The company added to its media cache the following year, acquiring four more channels as part of the Disney-Fox deal.

Joann Price has been helping Black entrepreneurs raise business capital for 40 years. She founded Fairview Capital Partners in 1994, and it has grown to the second-largest Black-owned private equity firm.

Robert F. Smith, a Black investor known for his philanthropy, founded the Vista Equity Partners private equity firm in 2000. His net worth is estimated to be over $7 billion, according to the Bloomberg Billionaires Index.

“We are here and we are represented for sure in terms of investment bankers, private equity guys and entrepreneurs who are running businesses in the middle market space for sure,” Whitehead acknowledged. “But it’s far and few in between. It’s nowhere near like other ethnicities, like the Jewish community or the WASP community, or I would say maybe even the Asian community.”

That’s oftentimes due to a lack of capital, awareness and business relationships. Whitehead is using his network of business connections to curate a list of African-American business owners and CEOs. He hopes to use the list to position them for more successful business acquisitions and merger deals.

“I’m charged with how can I creatively help find more buyers who look like me and make them credible, exciting, prospective buyers for some of the sellers,” he said.

Whitehead likened himself to a guidance counselor who advises entrepreneurs and CEOs how to grow their businesses. Investment bankers like him are key power brokers who have access to both sides of the M&A negotiations. They serve as intermediaries who help connect prospective buyers with interested sellers who are willing to negotiate. It’s predicated upon those negotiations that business deals generally live or die.

“Really, you’re only limited by the limits of your creativity in real life,” Whitehead said, quoting a mantra he learned from Dr. Isabella Jenkins, his former honors director at Clark Atlanta University.

“It’s all negotiation,” he added. “My best advice is to approach it the same way that you would approach any large asset, like you’re buying a car or like you’re buying a house. It’s still going to be a negotiation. And it really depends on what the seller is looking to do or trying to do.”

The Reebok Deal
When rap mogul Master P and retired NBA All-Star Baron Davis revealed they were in negotiations to buy Reebok in December, the announcement made waves in the worlds of sports and entertainment.

Adidas purchased Reebok for $3.8 billion in 2005. The German apparel company sought to use the brand to further its inroads in the U.S. sportswear market. It was part of Adidas’ quest to overtake Nike as the global leader in the industry.

But Reebok’s sales were sluggish and never lived up to those ambitions. Now Adidas is gearing up to dump the Boston-based fitness brand. Executives made it official Feb. 16, announcing that the parent company has started the formal divestment process to part ways with Reebok, Reuters reported.

Davis and Master P — real name Percy Miller — publicized their plans to make a bid for the struggling company Dec. 28, back when Adidas reportedly was asking $2.4 billion. It’s a deal that would make Reebok the first major Black-owned shoe company. But Miller made it clear he had no intentions to pay the asking price.

“I think that this company is worth maybe $500 million,” he told CNBC at the time. “So when we get down to the terms, we’re going to show Adidas why this company is where it’s at and why they should sell to us.”

Reebok may not have the popularity it once did in the late 1980s and early ’90s, back when sneakerheads were lining up to buy kicks with the signature Pump fit. But it remains a billion-dollar asset with distribution throughout North America and Europe.

Miller is a serial entrepreneur who’s founded several businesses since catapulting No Limit Records to a $100 million independently owned label. Davis had a shoe endorsement deal with Reebok when he was a player. He was an early investor in Vitamin Water and has started a handful small businesses of his own.

But one banking source told Reuters that Reebok may still be worth $1.2 billion. Many wondered how a rapper and retired athlete could pull off such a buy.

It’s actually not that unprecedented. Miller alluded to blueprint for his and Davis’ power move when news of the proposed deal was introduced to the world.

“Took a page out of Reginald Lewis’ book, buying major companies to put money back in our communities and to give our people opportunities,” the ex-rapper tweeted Dec. 29.

‘Jackie Robinson of business’
The book to which Miller was referring is one that’s become a testament of Black wealth-building.

“Why Should White Guys Have All the Fun: How Reginald Lewis Built a Billion Dollar Empire,” is the memoir of an iconic Black business magnate.

The New York Times bestseller lays out a blueprint that is studied by many Black entrepreneurs to this day.

Reginald F. Lewis was a Baltimore native born to modest roots in the age of segregation. He became one of the wealthiest Black tycoons in American history using corporate takeovers as his approach.

Whitehead remembers reading Lewis’ teachings as an undergraduate at Clark.

“He was like Black people are always looking to start businesses from scratch, as opposed to buying a business already up and running,” Whitehead said. “And he said more people need to buy businesses already up and running.”

Lewis spent years on Wall Street helping to broker major deals as a high-powered corporate lawyer. But he forayed into high finance as a venture capitalist in the 1980s. That’s where he built his empire through business acquisitions one deal at a time.

Lewis created the TLC Group, a private equity firm that specialized in acquiring well-established companies in decline. Oftentimes the businesses had brand recognition and a proven track record when Lewis took ownership. But they’d become less profitable, and Lewis devised shrewd strategies to streamline operations and revive the struggling companies.

“You can put down very, very little equity,” Whitehead explained. “And when you put down very, very little equity, the ratio of your returns is just insane because you didn’t put anything down. But you got a lot out of it.”

He masterminded a pair of high-stakes leveraged buyouts that wowed the financial industry. LBOs are a type of corporate takeover where one company acquires another, borrowing most of the funding to cover the up-front cost of the purchase. The secret is to target stable companies that have steady cashflows that can be used to quickly pay off debt and interest fees once the acquisition is secured.

Lewis did just that when his private equity firm bought the McCall Pattern Company, a century-old home sewing business, for $22.5 million in 1984. Lewis, his family and friends put up just $1 million of their own money. Lewis secured the rest of the capital by convincing top financial firms to invest in the venture. He quickly turned the company around and sold McCall Pattern for $90 million within three years.

Lewis turned his $1 million investment into more than $70 million. The masterful flip cemented him as a major wheeler-dealer on Wall Street. But Lewis wasn’t done.

He managed an even bigger feat in 1987 when his company acquired Beatrice International Foods, a multinational food and grocery conglomerate with footprints in 31 countries. Lewis negotiated a complex LBO that required him to sell off some of the company’s assets while taking ownership. It made Beatrice International the first Black-owned company with billion-dollar revenues.

The achievement solidified Lewis as a pioneer and a guru. One Wall Street exec dubbed him the “Jackie Robison of business.” He was the first Black businessman included on Forbes list of America’s 400 wealthiest people when he was added in 1991.

Lewis contributed some of the vast wealth he amassed back to the community and civil rights causes. He was one of the early donors who bankrolled Jesse Jackson’s presidential bid in 1984. He made a $1 million grant to Howard University in 1988 and established the Reginald F. Lewis Foundation, which doled out millions while he was alive.

When Lewis died of brain cancer in 1993, his net worth was $1.4 billion. He was 50.

Lessons Learned
M&As can be very lucrative deals involving billions of dollars in assets. But Whitehead said the final decision often comes down to relationships. Many times, he said sellers want to know that their values are shared by the prospective new owners.

“Because what comes up with a lot of these deals is not so much do you have the cash? It’s who the hell are you, and can the seller be comfortable with you buying it,” he said. “It’s not so much good standing in terms of like the common credit profile from Experian, Equifax and TransUnion. But oftentimes, it’s like who you are. It’s your track record and your reputation.”

Whitehead explained that business owners should have a succession plan in mind when they take over a new business. Whether they plan to pass it on to a family member or eventually sell to a private investor, they should start setting the business up for that fate from day one.

“I think the moment a business owner’s thinking about ‘I want to get in this business,’ they should simultaneously and seriously consider ‘how do I want to exit this business? How do I want to grow this business?’”

Whitehead said he’s been trying to devise a way to blend an element of social reform into his craft for years. His work to assemble a more in-depth international list of Black business owners and align them with interested sellers is a calling that’s rooted in Lewis’ formula for success.

“I’m in a unique position to help, you know, create more Reggie Lewises,” he said. “It’s like who are these individuals that are looking to buy some of these businesses and giving them a first look.

“In every field of human endeavor, we all can play a part in closing the racial wealth gap and making the world a better place for our nieces and nephews, sons and daughters, mothers and fathers,” he added. “And in every field of human endeavor … you can discover your deeper calling and how you can help the movement.”

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