As a transformational merger between two office furniture giants heads for final approval, the details of their seven-month courtship offer insight into a deal that could change the industry’s landscape.
Zeeland-based Herman Miller Inc. in April shocked the industry when it announced it would purchase long-time competitor Knoll Inc. in a $1.8 billion cash-and-stock deal.
The pending deal, which is up for shareholder votes at both companies on July 13, was the result of back-and-forth proposals that began in December 2020 and nearly fell apart because of eleventh-hour renegotiations just four days before news of the merger became public.
A prospectus filed in late May with federal securities regulators included a thorough record of the deal-making process, outlining both major — and seemingly minor — meetings, negotiations and discussions.
One West Michigan-based securities attorney who regularly reviews filings of this nature told MiBiz the uncharacteristically robust S-4 filing with the U.S. Securities and Exchange Commission contained the longest background section he had ever read.
Meanwhile, the blockbuster deal developed several months into a global pandemic that threatened to shake the foundation of the office furniture industry as employees worked remotely en masse. As shareholders at both companies prepare to vote on the deal, Herman Miller now seeks to address any new dynamics that may emerge.
“This shows a lot of confidence by Herman Miller in the future of the furniture industry, which is an industry that was hit significantly by COVID in general,” said Elisa Berger, vice president of Grand Rapids-based M&A and investment banking firm Charter Capital Partners, which specializes in working with clients in the contract furniture space.
“Ask someone in March or April of 2020 what the office furniture industry was going to look like in the next five years, and I don’t think anyone would be confident in their answer,” Berger said. “For me, this is a signal that Herman Miller sees a future in this industry.”
Knoll receives a lifeline
The prospectus detailed efforts by Knoll executives and its board of directors to deal with the economic hardships brought on by the COVID-19 pandemic, even before Herman Miller entered the picture. In April 2020, just a month into the pandemic, Knoll’s board determined that the company could potentially be in an uncomfortable liquidity position by the end of the year, possibly in violation of its financial covenants.
Despite cost-cutting measures, East Greenville, Pa.-based Knoll saw that its worst-case scenario emerged as the most likely trajectory. At a May 5 board meeting, the company’s internal auditors resolved to include a going concern warning in Knoll’s next quarterly report, indicating the grave uncertainty over the company’s future.
But the office furniture maker would find a lifeline in European investment firm Investindustrial Acquisition Corp. (NYSE: IIAC), which owns a portfolio of businesses in the health care, technology and manufacturing sectors. In fact, Knoll rebuffed a previous attempt by Investindustrial and a sponsoring company to purchase Knoll through an all-cash offer in January 2019. Knoll declined at the time, claiming the price didn’t match the company’s intrinsic value.
The investment group, which would factor into the eventual Herman Miller deal, later purchased 4 percent of the outstanding shares of Knoll’s common stock and provided a standing offer to serve as a source of financing for Knoll, if needed.
In time, Knoll took Investindustrial up on that offer for financing, closing in July 2020 on a $164 million investment agreement in which Investindustrial acquired 164,000 shares of Series A convertible preferred stock. The Knoll board believed the investment would fortify the company’s balance sheet, enhance its ability to execute on its strategic plan in the uncertain economic environment, and explore other opportunities that might arise, according to the prospectus.
Herman Miller pursues deal
Herman Miller laid the groundwork for the blockbuster deal during a regularly scheduled meeting with members of the company’s management team and representatives from Goldman Sachs Group Inc., its long-time financial adviser.
At an Oct. 12 board meeting, Herman Miller management and Goldman Sachs personnel presented a financial analysis of Herman Miller’s potential acquisition of Knoll. The board asked executives to reach out to Knoll and explore a potential deal.
Eight days later, Herman Miller formed a board subcommittee to consider the potential acquisition of Knoll, and met to discuss the strategic rationale for the potential deal and to review deal terms.
Herman Miller President and CEO Andi Owen also called Knoll CEO Andrew Cogan to discuss a potential business combination. During the call, Owen shared her great respect for Knoll and that she believed there was a “compelling strategic logic” to bring the two companies together given their complementary product portfolios, similar digital initiatives and shared commitment to design, according to the filing.
This ushered in a volley of proposals that started in December of last year, beginning with an all-stock offer that failed to ignite negotiations.
After Owen and Cogan spoke by phone on Dec. 18, Owen delivered a non-binding proposal to Cogan that called for the exchange of 0.5 shares of Herman Miller common stock for each share of Knoll common stock. The offer implied an enterprise value for Knoll of $1.42 billion, and Knoll shareholders would own approximately 30 percent of the combined company. Herman Miller’s proposal also indicated the company’s belief that the proposed business combination would yield $80 million to $100 million in annual synergies.
Knoll turned down the offer, calling it “sufficiently distant” on price and saying the company would not engage in further discussions, according to the filing.
However, a determined Herman Miller was able to spark discussions on Feb. 1 of this year with a second proposal: A cash-and-stock offer that called for the exchange of $11 in cash and 0.32 shares of Herman Miller common stock for each share of Knoll common stock, implying a $1.65 billion enterprise value for Knoll. In that deal, Knoll’s shareholders would then own 22 percent of the combined company.
While Knoll’s board found the second offer to be insufficient, it opted to pursue discussions on the rationale for the proposed transaction. That led to a Feb. 25 teleconference meeting involving representatives from both sides, including Cogan and Owen. Both parties resolved to go back to their boards to continue considering a potential transaction.
Knoll issued a counterproposal in early March that placed a $1.91 billion enterprise value on the company before a third proposal by Herman Miller pushed negotiations to the due diligence phase. This March 12 proposal included $11.50 in cash and 0.33 shares of Herman Miller stock per share of Knoll common stock in a deal valued at $1.82 billion.
Knoll also communicated with its previous suitor, Investindustrial, to see if the investment group still had any interest in acquiring Knoll. Representatives from Investindustrial conceded that they would not be able to submit an offer that would prove competitive with a strategic buyer’s bid that would offer significant synergies. However, Investindustrial did say it would support such a deal as long as it was consistent with its view of Knoll’s fair value.
A deal in peril
The deal nearly died roughly one month into the due diligence process when concerns arose during a special meeting with the Herman Miller board and its advisers. Herman Miller had discovered that Knoll’s internal projections and other findings throughout the due diligence process “would increase integration costs above what the Herman Miller team had expected or otherwise limit the achievable synergies in unanticipated ways.”
On April 14, Owen contacted Cogan to inform him certain value assumptions made by Herman Miller had not been supported by due diligence and instructed representatives from Goldman Sachs to reach out to Jeffrey Harris, lead director of Knoll’s board, with those same concerns.
Goldman Sachs representatives told Harris that Herman Miller’s estimates on short-term cash flows, the timing of synergies resulting from combining the businesses and other matters differed from the actual findings, meriting a downward adjustment of $3.20 per share, even though Herman Miller wasn’t necessarily proposing that exact price reduction.
The late-game renegotiation proved to be a deal breaker: The Knoll board voted unanimously on April 14 to shut off Herman Miller’s access to a virtual information room and cease negotiations while instructing Herman Miller to return or destroy all information provided by Knoll.
In an email to Goldman Sachs representatives, Harris wrote: “Knoll was not looking for a buyer and would only consider a potential transaction if the process would be expedited with minimal distraction for the Knoll Board and Knoll management and if the value to Knoll’s stockholders was sufficiently compelling.”
After seeing its concerns rebuffed, Herman Miller submitted a revised proposal on April 15, which Knoll rejected, leading to another call between Cogan and Owen. Cogan expressed that the “back and forth had not been received well by the Knoll board.”
Owen contacted Cogan later that day with a “best and final offer” of $11 in cash and 0.32 shares of Herman Miller common stock for each share of Knoll common stock to push the deal’s value back up to $1.82 billion.
On April 15, Knoll’s board of directors unanimously voted to accept the proposal.
With the deal, Herman Miller also will buy outstanding shares of Knoll’s preferred stock from Investindustrial for $253 million in cash, or $25.06 per share. Investindustrial, which aggressively lobbied directly with Herman Miller throughout the proceedings for preferred stock as opposed to cash, agreed to vote its shares in favor of the deal.
Effects at home
Herman Miller clearly didn’t land a COVID discount on the purchase of Knoll, whose stock bottomed out at just less than $9 per share in April 2020 in the early stages of the pandemic. The stock eventually recovered to $19 per share in March 2021, and jumped 35 percent upon the merger announcement. Herman Miller’s stock dropped around 8 percent upon the announcement but has since rebounded.
While it remains unclear how the combined business would address redundancies in function, the local region is positioned well to benefit from the merger, according to Jennifer Owens, president of economic development firm Lakeshore Advantage.
“It’s always great to be the home for the company that is acquiring versus one being acquired,” said Owens, whose organization focuses on helping companies grow in both Allegan and Ottawa counties.
“That, I think, puts our community in a better position and the leadership and headquarters will still remain here with Andi Owen as the head of the new consolidated business,” Owens said.
Lakeshore Advantage’s two-county jurisdiction has seen additional blockbuster deals in the past. In 1996, Johnson Controls Inc. acquired Holland-based Prince Automotive, a manufacturer of products for auto interiors, from the Prince Holding Corp. for $1.35 billion. In 2019, Tokyo-based Hitachi Ltd. purchased custom automation systems provider JR Automation for $1.42 billion.
“In those cases, we’re really working to build relationships with the out-of-state and out-of-country headquarters and making sure we’re more than just a dot on the map and they understand the value proposition of West Michigan and that we want to be that company’s partner in growth,” Owens said.
Owens also said that the community at large would benefit from serving as the home base for the newly crowned leader in office furniture.
“I think it definitely increases the awareness of our community as a place to grow, design and make products,” she said.