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Orphans Look For Love
From The Business Journal
By Robert Goldfield Business Journal Staff Writer
The situation is a common one: a small but plucky public company in a low-tech industry produces solid profits but gets ignored by Wall Street.
The Northwest is home to plenty of these orphan companies, their abandonment clearly evidenced by their sagging share price. The directors of such companies often ponder strategies for boosting that share price. Alternatives include buying back shares from the public, growing by buying some other companies, or selling out to a larger company. Another option, increasingly, is finding a group of investors willing to take the company private.
"There are a lot of these smaller companies in the lower-growth segment of the economy that are undervalued," said Rodger Adams, a partner in local investment banking firm Veber Partners. "That's causing some companies to consider that they might get a better valuation going private."
Locally, the majority owners of Vancouver's Western Power & Equipment Corp. have laid plans to take back shares of the construction equipment retailer that are owned by the public. Also, Portland's Cascade Corp., which manufactures attachments for forklifts, is evaluating buyout offers that include a privatization bid by members of management.
Regionally, Seattle apparel company Cutter & Buck has been included on U.S. Bancorp Piper Jaffray's list of the nation's 20 most undervalued yet profitable and growing small-cap companies, a group that tends to attract buyout offers, including bids to privatize.
Nationally, the number of public companies taken private each year has steadily climbed from 11 in 1995 to 74 in 1999, according to Houlihan Lokey's Mergerstat. In the first quarter of 2000 they totaled 19.
In the past two years the stock market has only favored certain kinds of companies, large ones and high-tech ones, Adams said. The ones left behind by the exceptionally picky bull market, especially the smaller and more staid businesses, find themselves forgotten. Investors have little interest in buying shares, and analysts have little interest in researching them.
Sometimes it takes only one quarter of poor earnings or one unexpected write-off to trigger a cycle of reinforcing events that lead to orphan status, said Kip Clarke of Cleveland's McDonald Investments Inc.
"The stock declines dramatically, analyst coverage evaporates, institution[al] investors flee, liquidity is reduced and the remaining shareholders watch their investment stagnate," McDonald explained in a recent report.
Meanwhile, the amount of capital raised by private equity groups has grown exponentially in the '90s, from less than $20 billion in 1991 to nearly $300 billion in 1998, the report said. That gives the private buyout groups plenty of money to invest in undervalued public companies.
"There are a lot of these companies that never should have gone public," said John von Schlegell, principal in Portland's Endeavour Capital, which to date has invested in privately held businesses. "A lot of people have a dream or desire to take a company public and when they get there they realize it's not all that it's cracked up to be."
Just a few years ago initial public offerings were the rage for small companies, von Schlegell said. The companies probably could have obtained the capital they needed from private investment sources, he said. But the prestige of going public, and the sudden liquidity it provided to founders and other insiders, proved very attractive. Now many are abandoned not only by Wall Street in general but even by the investment banking firms that managed their offerings.
"We're probably looking at five to 10 of them [in the Pacific Northwest], at least from a distance, at any given time right now," he said. "More likely than not, of the investments made by our new [$125 million] fund, one or more will be public companies going private."
Going private confers additional benefits on a company besides curing a low share price, von Schlegell said. It restores a veil of privacy, which can be a competitive advantage. It also eliminates costs associated with trading publicly, such as the cost of investor relations work and of filing docu-ments with the Securities & Exchange Commission.
Most importantly, going private eases the pressure for short-term gains.
"Wall Street is very impatient," he said. A private investor might well favor a business strategy that sacrifices short-term earnings growth for better long-term prospects. Investors and analysts of public companies, however, tend to concentrate on quarter-by-quarter results.
Von Schlegell said that Wall Street's current lack of support for small-cap, old-economy businesses will eventually turn around.
In the meantime, plucky little public companies suffering from abandonment issues might want to become plucky little private companies.
Copyright 2000 American City Business Journals Inc.
Click for permission to reprint (PRC# 1.1640.332032)
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