What I Learned From Going Public
In 1970, when I took my first company public, the market was falling. We had to sell our stock for less than we'd hoped, and our expenses seemed astronomical. I ended up feeling that I had more people looking over my shoulder than a hot Las Vegas crapshooter does -- hundreds of actual and potential shareholders, a couple of dozen investment bankers and analysts, the financial press, and the Securities and Exchange Commission.
On the other hand, going public did great things for the company. It helped us meet our corporate financial and growth objectives quickly. And my top managers, who had acquired stock at 25? a share early on, saw the value of their holdings increase more than 3,000%.
Should your company go public? Maybe my experience can serve as a guide.
I founded Time Industries Inc., a corrugated box and packaging company, in 1958, largely on borrowed money and my experience in sales management for a couple of large packaging companies.
The company was built with internal earnings and hard work until about 1964 when, with a net worth of about $250,000, we found an opportunity to buy a paper mill for about $5 million. To make the acquisition, we borrowed $3 million from Continental Illinois National Bank and paid for the rest with Time stock, which the paper mill's seller was willing to value at approximately $3 a share.
We began thinking about going public because we believed that selling shares on the open market would reduce our debt so we could obtain further conventional financing for growth. We also wanted to have tradable stock so it could be used for acquisitions. And we hoped to increase the value of management's long-held shares.
In 1968 and 1969 the stock market was rising. It was better for new issues than it's been since. By 1969 we felt the timing was right to go public.
Unfortunately, going public is an amazingly complex process, and you can't go ahead until you've done all the paperwork and obtained SEC approval.
First we had to find an underwriter (an investment banker who would market our stock). We settled on William Blair and Co. because Blair had stature in the industry. He also had the ability to provide us with a "firm" or guaranteed underwriting, rather than a "best efforts" underwriting. That meant that if our stock didn't sell, the underwriter would purchase the remaining shares. And on top of that, the chemistry was right: They were people we trusted completely.
We were attractive to William Blair because of our steadily increasing earnings. We had reached $500,000 a year and Blair felt our growth could be attributed to skilled top management.
Although I have mixed feelings about my experience of going public, I know that the success we had was largely due to William Blair's expertise.
Working with Blair, we decided to sell 400,000 shares at $12 per share, which was 10 times earnings. We filed to go public in mid-1969, but because the SEC was swamped with filings we didn't get the go-ahead until early 1970. The market had begun declining in the fall of 1969.
Thus we learned another lesson about going public -- you can't tell how much money you'll be able to raise almost until the day you raise it. William Blair called us in to tell us the market wouldn't pay more than $8.50 a share for Time Industries.
After a year's work we were going to receive 30% less than we had expected. We decided to go ahead, but to reduce the number of shares offered from 400,000 to 200,000. Managers would sell 53,000 of their own shares and the company would sell 147,000 new ones. The principals, including me, would retain about 60% of the company.
We went public on February 3, 1970. The experience demonstrated that for a company like ours, going public was a realistic way of reducing debt and making our stock more valuable, though it made me wonder if there weren't some easier way.
The stock sold. Almost all was purchased by individuals on the recommendations of brokers who assisted William Blair in the underwriting.
Time Industries' managers made money, and the company's debt was reduced. The successful stock sale helped us acquire eight other businesses over the next several years.
But there were problems:
A small company in an unexciting industry may find shareholders have a hard time selling their stock even after the firm has gone public. Our stockholders did not have an active market for their shares. Investors tended to think of Time Industries as just another over-the-counter company. A packaging firm is no glamour stock.
The company continued to prosper, but as a small publicly held company we had the same SEC reporting requirements and expenses as a large publicly held company. We had to prepare elaborate annual and quarterly reports, inform the SEC of important developments in our business, and conduct annual proxy mailings and shareholders' meetings. Moreover, to keep the new stockholders happy I had to avoid doing anything that would cause even a temporary drop in the stock's price.
In sum, we had regrets about going public when we did. But as I look back at the 1970s, a poor decade for selling stock to the public, I believe that I made the right decision.
About five years after Time Industries went public, an Ireland-based firm named Jefferson Smurfit Group Ltd. acquired the company in two stages for an average of about $10.50 a share. I still sit on their board of directors.
My banker at Continental Illinois National Bank recommended I buy another company, Clark Products, a privately held restaurant and institutional food supplier in Chicago. I bought it with bank financing in 1975, when it had sales of $18.5 million. Its sales have grown to over $75 million today.
What have I been thinking about for the last two years? Taking it public.
I learned a few principles the first time around, however, that I'll pass on to you.
First, be realistic about your objectives. If your objective is to provide financing to acquire other companies, repay outstanding debts, or finance an immediate expansion, I'd suggest you consider other sources of finance first. Almost any other capital source is likely to be easier to deal with than the public market.
But if one of your objectives is to multiply the value of your equity, there is no other way -- short of selling your company outright -- to do it as well and as quickly as by going public.
Even if that is your objective, you shouldn't try to take an unglamorous company public unless you have earnings of at least $1 million a year. You need that much earnings to be able to sell enough shares to the public to create liquidity and to command a high enough price per share so that your offering won't be dismissed as "junky."
You should also be able to show substantial growth in earnings over the past five years, have top management in which bankers and others consistently demonstrate confidence, and honestly believe that you would buy the stock yourself if you were an investor.
In 1970 I followed some of these guidelines. The next time I go public, I'll follow all of them.
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