Goodbye, Wall St.: A Snubbed Firm Opts to Go Private
Jostens Inc. had a nice little business that Wall Street no longer cared much about. Management tried a number of tricks to impress the Street, but nothing seemed to work.
By late last year, the Minneapolis-based firm’s stock was selling under $18 a share--no higher than it was in 1993.
In this technology-mad market, in which companies are rewarded with stratospheric stock prices for losing oceans of money, Jostens’ tidy profit margin on $800 million in annual sales of class rings, high school yearbooks and other “educational achievement”-related products was the wrong formula for success.
So along came a group of investors with a better idea: take the company private, with management’s help. The group, New York-based buyout firm Investcorp, offered $25.25 a share in December, a premium of nearly 40% to the stock’s market price. The deal is expected to close in coming months.
The terms “management buyout” and “leveraged buyout” became part of the investment lexicon in the late 1980s, in the heyday of corporate raiders, Michael Milken and junk bond brokerage Drexel Burnham Lambert. Before it all got way out of hand, the basic idea was sound: Companies whose shares weren’t fairly valued in the public market were taken back into the private market, in which the businesses could be run without having to worry about making disparate shareholders happy.
Today, the going-private idea is blossoming again. Last year, the total value of such private buyouts--as distinct from takeovers of one public company by another--surged to $20.6 billion from just $8.3 billion in 1998. Last year’s total also was the largest buyout deal sum since 1989, according to Thomson Financial Securities Data in New York.
In terms of individual transactions, however, the numbers still are small: Just 165 buyouts were announced last year in all. By contrast, the number of companies converting from private to public ownership via the red-hot initial public offering market was about 550.
But if the stock market’s split personality persists--with many technology shares still flying high, while the majority of stocks sink, in some cases to their lowest levels in four or five years--the idea of going private may appeal to many more dejected corporate managers and directors.
After all, the major reasons for being public in the first place are (1) the ability to raise capital via additional stock sales and (2) the ability to offer stock options to employees and new recruits.
But if your stock is extremely depressed, you aren’t going to be trying to sell new shares. Likewise, depressed stocks don’t have great appeal even when offered in the form of discounted options to would-be employees. May as well just offer them cash.
(Besides, there’s nothing to stop a private company from offering a piece of the equity to its employees. UPS, the shipping giant, was in part employee-owned for decades before it went public last year.)
Still, most major U.S. companies that now are public--the Fords, Wal-Marts and Boeings of the world--almost certainly will never contemplate going private again, no matter how beaten-down their shares may get.
For the vast number of mid-size and smaller companies (such as Jostens), however, privatization is a legitimate option. And those are the types of companies that many corporate buyout funds, such as Investcorp, tend to target anyway.
Certain buyout funds became household names in the 1980s for their high-profile--and, in some cases, ultimately disastrous--deals. The king of the leveraged buyout--deals done using often massive sums of borrowed money to buy out public shareholders--was Kohlberg Kravis Roberts.
KKR is, in fact, still a major player in buyouts today. But its deals, and most such buyouts, are a far cry from the transactions of the 1980s. For one thing, the amount of leverage used is typically much less. As Brad Freeman, a principal at Los Angeles-based buyout firm Freeman, Spogli & Co., notes, banks and other potential lenders today “aren’t as accommodating as in the late-1980s,” given memories of deals that collapsed under the weight of the debt.
Today, a buyout fund making an offer for a public company is likely to put up about a third of the money in cash and borrow the rest.
The goal then becomes to run the business so well that, even with the debt cost, the return to the fund’s investors (and the company’s management) is better than what they could earn simply buying a stock market index fund.
And eventually, the goal often becomes either to sell the business (say, to another company) at a substantial gain, or take it public again.
So why don’t more companies that are selling for bargain prices in the stock market today find themselves on buyout funds’ radar?
Investors like Freeman say they are in fact seeing a lot more that interests them. And there is plenty of money in buyout funds. “A significant number of funds have raised a lot of money in the last three years,” said Mark Albert, director at investment bank Credit Suisse First Boston in L.A.
But buyout fund investors have been bitten by the same tech bug as venture capital investors. Many buyout funds today are just as likely to take equity stakes in young public or private tech firms as they are to fund a full-scale buyout of a business.
Yet with so much money chasing tech ideas, many buyout investors concede it’s at least worth asking this question: Are the better returns over the next five years likely to be in the sector everyone wants today--or in solid, already profitable businesses whose shares are a relative steal at current prices?
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Tom Petruno can be reached at tom.petruno@latimes.com.
