Public vs. Private — Wall Street Sways FortunesApril 2007 By Erik Cagle
Wall Street, that is. And, in this regard, never has the phrase “perception is reality” rang more true.
“When you’re publicly traded, you talk about the business of being a business,” adds Baksha, whose company was sold in 2006 for $46 million to Vista Group Holdings, a private equity group that includes former Banta CEO Calvin Aurand. “It’s perception. How you have to deal with Sarbanes-Oxley and what others are saying, which adds absolutely no value to the company.”
The direct mail and package printing firm based in Neenah, WI, opted to go private, in part, to generate liquidity for shareholders. As a microcap company, Outlook shareholders were at the mercy of Wall Street.
“Our investors found their investment going up and down, wildly, totally unrelated to the performance of the company,” Baksha says. “It was time to give them the liquidity they couldn’t get by selling their stock. And when you combine that with the cost of Sarbanes-Oxley, that would have put our ‘cost of being public’ bills in excess of $1 million per year, which is 10 percent to 11 percent of our EBITDA. It didn’t make sense to stay public and not give (shareholders) any kind of return on their equity.”
Wall Street vs. Printers
The current atmosphere of the stock market does not seem to be favoring printing companies. In many cases, companies find that private equity investors, with the willingness to take a long-term investment approach as opposed to quarterly gratification, are a more attractive alternative.
Harris DeWese, chairman and CEO of Compass Capital Partners, has consulted on more than 100 industry transactions. He has seen countless company balance sheets and firmly believes publicly traded printers are not being rewarded for their earnings in the public market. Thus, he says, either management or a large shareholder may decide to take the company private to create greater enterprise value.
The difference can, at times, be drastic. “You can have a company that’s getting rewarded at five times EBITDA in the public market, whether it’s NASDAQ, AMEX or NYSE,” DeWese explains. “In a private transaction, it’s worth seven times EBITDA. If you’re a shareholder in that company, your shares are going to be worth more if you take the company private, and you’re probably going to do that with leverage—a big loan—so then your return on equity becomes substantially greater.”
The lure of accessing capital for expanding a printer’s equipment arsenal is one factor that leads private companies to conduct an Initial Public Offering (IPO). VistaPrint, a Web-based printer geared toward small businesses, raised $100 million in its IPO, bolstered by another $60 million obtained through venture capital funding. According to Robert Keane, president and CEO of Lexington, MA-based VistaPrint, the decision wasn’t difficult to make, considering the company’s needs.
“Without this large level of equity funding, plus significant additional debt financing, our business model is untenable,” Keane remarks. “VistaPrint has an explicit strategy of serving micro-businesses, which place tiny orders averaging about $30, including shipping charges. The only way for us to make money at that price is to have ultra-high-volume, capital-intensive facilities, with expensive automation at every step of the process. Being public makes that possible.”
The move helped accelerate VistaPrint’s investment initiative, which also helped filter out possible competition from would-be emulators with smaller bankrolls. The company will have invested $25 million in software development and $80 million in marketing during its fiscal year ending June 2008.
Having a strong balance sheet enables VistaPrint to make day-to-day operations investments that resemble the annual capex budget for many printers, according to Keane. Current quarterly capital investments (excluding the software development budget) were expected to total $25 million.
For some companies, it makes more fiscal sense to escape the public realm. Mickelberry Communications, parent company of Clifton, NJ-based Sandy Alexander, used to be listed on the NYSE. Since Mickelberry’s largest shareholder had controlling interest and the holding company’s businesses in the aggregate were relatively small, the stock was thinly traded. The cost of compliance to remain public was in excess of $1 million, recounts Roy Grossman, president and CEO.
“There was a lot more flexibility in taking the company private. It allowed the principal shareholder better avenues to reward senior management and more flexibility in creating equity propositions,” he says.
“Taking the pressure off having to respond quarterly to the investment community and having a long-term perspective, particularly in this business, is a critical advantage. When you have to report to the Street every quarter, you give them a (performance) target. You cannot afford to miss that target, because you’ll be slammed by the investment community. It forces you to do things short-term to make a number that is not always compatible with your long-term objectives.”
Reconciling short-term gain with long-term thinking is an art form that few CEOs have perfected, Grossman contends, and he points to Cenveo head Bob Burton as one of the few execs who can strike that balance. In the case of companies like RR Donnelley, absent organic growth, it takes acquisition binges to pacify Wall Street.
“There are some great (public) companies that have stumbled. Why? Not because their core business isn’t good,” he adds. “Look at Dell; they stumble because the minute their growth rate isn’t as dynamic as it has historically been, Wall Street discounts them. In the commercial printing industry, which is struggling to grow at the same rate as the GDP, you’re discounted right out of the gate.”
In the case of The MATLET Group, becoming a privately held company was a matter of survival. The five companies comprising the year-old firm (Acme Printing, Packaging Graphics, Central Florida Press, NOVA Marketing Services and Premedia Services of Detroit) were acquired from Quebecor World by a team led by Gary Stiffler, and the facilities were unrolled with original facility names under one umbrella, led mostly by their former company heads. Quebecor World had decided to go with its bread-and-butter platform, namely catalogs, magazines, books and retail. The divested companies that became MATLET were determined to be no longer core.
“Quebecor World enjoys long-term contracts, where they can see their presses are booked until next January. In our business, it’s more transactional,” Stiffler says. “I have longstanding clients, but I can’t tell you what’s going to run next month. That made it difficult for Quebecor World to justify investing in a new press when they couldn’t back it up with a long-term contract.”
As a private company with a flat corporate structure, Stiffler feels The MATLET Group is more nimble and can react better and faster to the needs of customers and employees. But they’re as cautious as a public company regarding equipment investments.
“We bought two presses in the first 18 months and have two more planned in the next 18 months,” he says. “But, we can’t afford to make a $6 million mistake. Buying the wrong press is more painful for us than it is for a larger corporation.
“We’ve implemented some of the same controls we had at Quebecor World as far as justification on capital. Any plant that’s looking at an investment has to go through the rate of return evaluation.”
Baksha disputes the theory that lower profit margins make it more challenging for privately held printing companies to garner capex financing. He says a company primarily needs to demonstrate good return on equity.
“There are some pretty healthy ROI numbers out there; our return on equity was like 22.8 percent,” Baksha notes. “If you have a solid return on investment, and cash flow for debt service, borrowing money is no big deal at all—whether you’re public or private. A negative net profit doesn’t mean anything if you have 10 percent or more EBITDA and 25 percent return on equity. At that point, who cares what your net profit is, because you’ve got cash flow and ROI that rivals anybody.”
Grossman feels many firms seeking to bolster their equipment dossier will opt for private equity investors as opposed to the highly regulated public sector. “The private equity market didn’t really exist 10 years ago. Today, that’s as an accessible means of growth as the public markets. A lot of that money is public money; they call it private, but there’s a lot of institutional money there.
“Private equity has the benefit of access to capital, but can also think long-term and strategically,” he adds. “Private equity investors go in realizing it tends to be, on average, between a three- and seven-year return. It’s much different than being public, where you must think in 90-day increments.” PI