Now, On to the Really Big Time

Some Inc. 500 CEOs are choosing to cash out through IPOs or mergers when their companies are seemingly at the height of their powers. Find out why.

By Thea Singer | 
 

No sooner had some Inc. 500 companies made this year's list than their founders sold the business or took it public

Given the pre-April dot-com lovefest that smote both the public and the private markets, it's no surprise that in 1999 the value of merger and acquisition deals and initial public offerings among small companies hit record highs. And despite the market correction this past spring, the figures for the year 2000 will probably be even higher, says Richard Peterson, an analyst at Thomson Financial Securities Data, headquartered in Boston.

But dot-coms are not the only corporate animals to benefit from the abundance of riches. Among this year's Inc. 500 winners, terra firma outfits like ASK Data Communications (#423), a $16-million provider of remote-access and security services to the computer industry, and Shore.net (#220), an $11-million Internet service provider, found themselves being snapped up in eight-figure deals. On the IPO front, the financial gains were just as astonishing, if not more so. For example, shares for $23-million Witness Systems (#88), a developer of customer-interaction-recording software, had a gain of 100% on the first day out and netted the company $76 million. Market activity for SpeechWorks International (#44), a $14-million developer of speech-recognition systems, almost made that look like small change: its share price rose 184% on day one, and the company walked away with $95 million.

Why are Inc. 500 CEOs choosing to cash out when their companies are seemingly at the height of their powers? The responses range from the obvious -- to finance growth -- to the not so obvious. "A lot of company owners are into the chase," says ASK Data president Robert Keller. "I'm more into the victory. From the minute I opened the company, I knew that at some point I wanted to sell it." Here are some snapshots of CEOs who have just crossed the finish line.

CEO/President: Max Oyler
Company: Kelmax Equipment Co. (#212), headquartered in Decatur, Ga.
Business: Manufacturer of metal racks and shelving for the food-service and supermarket industries
Deal: Sold to Leggett & Platt Inc., based in Carthage, Mo., a $4-billion manufacturer of residential and commercial furnishings
Goal: To finance growth without going into debt

When Max Oyler, 53, started Kelmax Equipment Co. with partner Frank Kelly, in 1995, the plan was to build a successful business by customizing a product that their former employer had been treating as a commodity. The idea of an exit strategy never crossed their minds. But as the company grew -- by some 25% to 30% annually over the past few years, with revenues reaching $9.8 million in 1999 -- they knew they'd have to either bring in cash or forgo certain growth opportunities. "Getting major financing would have run counter to our philosophy," says Oyler. "We borrowed some money from a bank in the beginning and when we opened our Southwest operation, because the expansion put a squeeze on our cash flow, but we didn't want to go into debt again. We were afraid that if the economy went south, we wouldn't be able to recover."

To advise them on the sale, the founders brought in the Geneva Cos., a business broker headquartered in Irvine, Calif. Although the eventual buyer, Leggett & Platt, had been eyeing Kelmax as a possible acquisition for about two years, Geneva initiated a limited marketing campaign so that at least five other suitors would enter the fray. "We wanted to see if we could get a bidding war going on us," says Oyler. In the end two companies put offers on the table.

Neither Leggett & Platt nor Kelmax will disclose the exact sum of the deal, but Geneva vice-president Jeff D. Herndon reports that the price was "less than $25 million in cash," which he claims is "at the high end or a little above" what privately held companies with financials like Kelmax's normally sell for -- around four to six times their pretax income. The transaction also included a three-year earn-out agreement.

At this early stage of the game -- the deal closed on July 10 -- the only downside that Oyler sees to the cash-out is that the partners no longer have the final word in making decisions. "Now all capital equipment, for example, requires three quotes and has to be properly approved," says Oyler, who remains president of Kelmax Equipment, now a division of Leggett & Platt. "But then, we probably needed that discipline in the past."

Oyler adds: "Before, we could see our investment in the company growing, but that didn't mean anything until we could actually rake it in. The sale has taken the chips off the table and put them in the bank."

CEO/president: Mitchell Jones
Company: W2Com (#162), in Dayton, Ohio
Business: Long-distance data carrier that puts long-distance-learning packages together for large companies
Deal: Sold to Arel Communications and Software, based in Yavne, Israel, a $13-million public software manufacturer and video-application service provider
Goal: To retain the company's value in an industry (telecommunications) in which private companies don't flourish

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