Banking and Finance: Going private

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If the 1990s were the decade of the IPO, some experts say the ’00s could be the decade of the anti-IPO.
The later years of the 20th century saw vast fortunes arise as if from nowhere, with initial public offerings by Internet companies such as Amazon.com Inc., as well as a host of lesser-known and less successful firms. The IPO became such a rush that it developed into a staple of cartoonists and stand-up comics.
Coming as the 20th century morphs into the 21st could be a reverse trend as public companies turn private, experts say.
Not that the publicly held company will be on the endangered species list or the pace of Internet, technology and telecommunications IPOs will slacken, says Richard Sullivan of Chamberlain, D’Amanda, Oppenheimer & Greenfield.
Really big and well-known companies, technology firms, telecommunications companies and Internet-based businesses-firms that have no trouble attracting analysts’ coverage and, therefore, attract many investors-will continue to go public and stay public, he says.
But if investors and analysts stay tightly focused on megasize global corporations and the high-tech sector, the question of whether to go private is “an issue that will be much more on the horizon” for many small and midsize firms in more traditional industries.
With an impaired ability to raise capital in a public market that greets non-Internet companies with a yawn, Sullivan says, non-tech and less well-known companies in sectors such as manufacturing have to think twice about whether the downsides of public ownership, such as Securities and Exchange Commission reporting requirements, outweigh the benefits.
The issue will come more tightly into focus this year, he says. After March, a new SEC requirement calling for publicly held firms to have quarterly rather than annual accounting reviews kicks in, and the cost of doing business publicly will go up for many firms.
A number of firms have already looked at the factors Sullivan talks about and have found the balance tipped in favor of privatization.
Until last year, Sullivan says, Chamberlain, D’Amanda had never helped take a client private. In the last 12 months, the firm has been involved in three public-to-private moves.
In the first quarter of last year, the law firm helped take Four Corners Financial Corp. private with a reverse stock split. Sullivan expects to file papers with the SEC to take a second Rochester company private within the next 30 days, and he is working on a third public-to-private deal, which he expects to be completed later in the year.
The trend is by no means confined to Sullivan’s clients.
Last month, Gleason Corp., a venerable manufacturer of gear-cutting machines that had been publicly held since the 1960s, announced its decision to go private in a leveraged buyout financing a $23-a-share stock buyback program. The company hopes to complete the buyback program by the end of this month.
While it had ups and downs over some three decades of public ownership, Gleason had generally performed well. A roughly $400 million a year company, it supplies gear-cutting equipment to automakers and other manufacturers worldwide and is currently regarded as an industry leader.
Still, management had come to feel that for much of Gleason Corp.’s publicly held history, Wall Street had undervalued the company’s stock. The $23 a share Gleason is offering represents a 31 percent premium over the stock’s average price for the 30 days immediately preceding the offer’s announcement.
Further reasons for the public-to-private move, says Gleason chairman and CEO James Gleason-who, along with three other managers and a venture capitalist, will end up owning the privatized Gleason Corp. if the deal is completed-are the same ones Sullivan says are inducing a number of companies to consider similar moves.
As well as suffering a stock price that did not adequately reflect the company’s value, Gleason says, Gleason Corp. has had to spend considerable sums to comply with SEC reporting requirements that produce virtually no information useful to the company itself. Additionally, analysts’ focus on quarterly results does not gibe with longer-term business cycles that affect the firm or with the timelines the company sets for itself.
Gleason Corp., furthermore, has never relied on public stock issues to raise operating or expansion capital, he says. The company first went public because an allied foundation at the time owned more than half its stock and the SEA required the move. The firm did not mount an IPO, and has since done no new money-raising stock issues.
At the same time, Wall Street’s consistent undervaluation of the company made it a takeover target twice between 1989
and 1999, forcing the company to adopt a poison pill to beat off unwanted suitors, Gleason says.
The leveraged-buyout strategy Gleason is pursuing is one that several firms seeking to go private can use. The reverse stock split gambit Four Corners Financial employed is a less expensive and, Sullivan says, sometimes more certain stratagem.
The reverse split technique aims to reduce shares outstanding to a number less than the SEC’s required 300-shareholder minimum for publicly held firms. Four Corners Financial simply arranged a 1-for-100 reverse split that cut shares outstanding from 15 million to 150,000 and shareholders from 1,194 to 186, so that under the SEC minimum shareholder rule, it had to go private.
Gleason Corp., on the other hand, has to have an OK from two-thirds of its shareholders, an approval that will presumably be forthcoming if enough shareholders take the $23 buyout offer. When the company announced the privatization attempt in December, James Gleason, other insiders who would end up as owners and the Gleason Foundation controlled 15 percent of some 9 million shares outstanding.
The Gleason Corp. public-to-private transaction will cost the company $332 million, $185 million of which is to be leveraged through financing from Deustsche Bank AG subsidiary Bankers Trust Co. The Manhattan-based venture capital firm, Vestar Capital Partners, is putting $55 million into the deal.
Should the planned public-to-private merger take place, Vestar will control two of the new corporation’s five board seats, with Gleason managers occupying the other three.
Vestar principal Sander Levy concurs with Sullivan’s analysis of the public market’s present climate for midsize and small manufacturing firms, and likewise believes going private will increasingly look good to a growing number of such companies.
Over the past 12 months, Vestar has been a partner in three public-to-private leveraged buyouts, including the ongoing Gleason deal. Levy says his firm, which has $6 billion in capital, could have done more, but it is highly selective, agreeing to partner only with companies whose chemistry matches Vestar’s own.
Chemistry aside, Sullivan thinks that a number of firms now doing leveraged buyouts with venture capital partners will find themselves in the publicly held arena again within the next five years or so.
One potential glitch in taking companies private can happen if managers do not adequately analyze long-term ownership possibilities.
It is reasonable to assume that, like private-placement investors, venture capitalists in going-private mergers will be looking for an exit strategy, Sullivan says. There are two main possibilities for making such investments liquid: sale of the company or returning shares to the public marketplace.
In some cases, he believes, managers who are taking companies private now may not adequately appreciate the likelihood of such developments. In the flush of completing public-to-private deals today, he says, “I don’t think there is usually much discussion of the venture capitalists’ exit strategy.”

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