What I Do In Public Isn't So Bad, Either
IT WAS ONE OF THE HOTTEST months in the hottest year in he history of initial public offerings -- June 1983. Tad Witkowicz took Artel Communications Corp. public, and now, three years later, he tells us he'd do it all again. So wound Joseph Mooibroek of American Medical Electronics Inc. And Donald Steen of Medical Care International Inc. And Nigel Webb of Damon Biotech Inc.
In fact, so would the overwhelming majority of chief executive officers of the 64 companies that made their public debuts in June 1983, according to an INC. survey. As a group, hhey are as enthusiastic about being public as so many private companies are about remaining private. Do they have complaints? Of course. Headaches? A bunch. What they lack, though, is the self-righteous smugness of some of their still-private peers who are quoted in the article above.
If putting themselves and their companies "under the thumb of Wall Street" was going to work out badly for any group, it would have been the Class of '83. They went public at a time when the lure of easy cash seemed irresistible, when investors and investment bankers were reaching for fruit not yet ripe. To any young business with a tech- or an -onics in its name, investors were saying, "Take our money, please."
About 680 companies did take the public's money that year -- more businesses than had gone public in any previous year. They raised some $12.5 billion, which was also an annual record until it was surpassed this fall. Were they unwise? Have they compromised their entrepreneurial virtue? Sold their souls? Lost their creative edge? Are they sorry now?
Not to hear them tell it. In fact, it's surprising how comfortably most of these companies seem to have accommodated themselves to the Big Three Bugaboos of Public Ownership: the loss of founder control, the financial reporting demands, and the dreaded shareholder pressure for short-term profit performance. "It's all been boringly simple," says Harold S. Schwenk Jr., co-founder of BGS Systems Inc., in Waltham, Mass. "Maybe the biggest surprise is that there have been no surprises."
Take control, for instance. Not one of the founding CEOs I checked in with complained about losing it. On the contrary, several see going public as a way of keeping control. Gabriel Raviv, president and co-founder of Bio-logic Systems Corp., in Northbrook, Ill., says he had a choice: he could either sell some portion of the company to venture capitalists, or he could take it public. He went public, he said, in order to distribute control "among many small shareholders, not one or two strong individuals."
That was much the same explanation I got from Tad Witkowicz, who desperately wanted to keep Artel from the clutches of "vulture capitalists," with their well-deserved reputation for dictating company policies and tossing aside company founders when the going gets a little rough. Unfortunately, since we talked, things have not worked out so well for Witkowicz. In September, his board of directors removed him as president and chairman. Although Witkowicz won't comment on the change, his experience proves the general point that there is always a risk of giving up control when you turn to somebody else for capital, whether the company is public or private.
Another common fear about going public concerns the reporting requirements. Not a single one of the CEOs I contacted complained -- or not much, anyway -- about providing financial information to stockholders and the Securities and Exchange Commission. "Filing reports," says Joseph Mooibroek, president of American Medical Electronics Inc., in Dallas, "isn't really a big deal. The 10-K is a major event, but it only comes up once a year."
Some, in fact, see the reporting requirements as a plus. "Our numbers are out there," Bio-logic's Raviv says, "which means our customers feel better about doing business with us. There's nothing we can hide. I think it helped us with the bank when we went for an industrial revenue bond to build our headquarters." And Nigel Webb, vice-chairman of Damon Biotech, in Needham Heights, Mass., argues that having the company's financial results talked about in analysts' reports and the financial press gives it higher visibility in its industry and therefore higher credibility -- "even though it's just a perception thing."
Short-term performance pressure is an issue. "There is far too much pressure to pay attention to quarterly results," Witkowicz complained to me before his ouster.But most CEOs I talked to said that Wall Street analysts can only put pressure on a CEO; they can't dictate decisions.Raviv says he has followed his game plan without pressure."We always low-ball our numbers to analysts," he says, "and we tell them we're going to have hiccups, but we don't know when. . . . There may be some pressure to do short-term things, but we've managed to stay out of that."
Granted, it might be a bit awkward for the president of a public company to criticize his stockholders or the analysts who help set the price for his stock. But I take on face value the assertion of CEOs such as Donald Steen of Medical Care International Inc., in Dallas, when he says, "We're not letting our being public influence the way we run the company."
So, yes, being public has its costs. But there are costs associated with getting a loan, too, whether it's from the bank or from Uncle Harry. Both will want to know what you intend to do with the money. Both will want progress reports. And both are going to charge you interest. The difference is that the bank is just a bank, but Uncle Harry is your mother's brother.
The bank or Uncle Harry? Public or private? City mouse or country mouse? We're talking lifestyles here, not moral choices. But in the debate as it is cast by the cheerleaders of privatization, the two kinds of issues get confused.
Privately held companies are not, as Warren Braun, of ComSonics Inc., seems to suggest, any better equipped nor any more likely than publicly held companies to be generous to employees. Braun has transferred ComSonics stock to his workers, but he could have done the same had the company been public. In fact, if ComSonics were public, employees could turn their stock into cash at the market price anytime they want. In a private firm, they don't have that option.
Besides, the vast majority of private-company founders do not share equity with their employees and wouldn't dream of it. Their attitude is much more likely to resemble John Oren's -- it's my company and my money (Oren, you will recall, is the Texan who is president of Eastway Delivery Services Inc.). It's small public companies that are more likely to use stock and stock options to attract and reward employees. For them, sharing equity is not an ethical issue of choosing generosity over greed. It's business issue: what's the best way to motivate employees?
I suppose it's true that many entrepreneurs don't trust Wall Street lawyers, consultants, and investment bankers. So what? I don't trust people who sell insurance or cars, but I do business with both. Entrepreneurs shouldn't trust investment bankers, but that's no reason not to buy their goods if their goods are what your business needs. "I needed money in 1983," says Lawis G. Zirkle, founder of Key Tronic Corp., based in Spokane, Wash., "and with the market the way it was, going public was the easiest way to get it."
Don't get me wrong. The market is also one of the easiest and quickest ways for founders of growing companies to get filthy rich. For example, consider the case of Calton Inc., a member of the Class of '83 and the Class of '86.
Calton, a residential real estate development company, headquartered in Freehold, N.J., was part of a larger company until Anthony J. Caldarone and some of Calton's current officers bought it in a leveraged deal for $13.6 million in 1981. They put up just $90,000 in cash. Two years later during the hot IPO market, they took Calton public. Then in '84, Caldarone and his partners sold most of their Calton stock to another developer for $8.3 million, but stayed on to manage the company. Caldarone took home $407,000 in compensation and profit sharing during the following year, but he found he missed owning his own business. So in 1985, he and his partners did another leveraged buyout, then took Calton public again in '86 while retaining 53% of the stock for themselves. Thus, in the space of five years, Caldarone and his partners have converted their $90,000 investment into at least $15 million in cash and $68 million in Calton stock.
The Calton story is a pretty good indication that greed thrives on both sides of the public-private divide. The same might be said for egotism and lavish spending. The Transamerica pyramid in San Francisco and AT&T's new Manhattan skyscraper are just bigger than the tasteless monuments that countless smaller-company entrepreneurs build to their own expanding venities. Perhaps an extreme example is Edward Baker, whose Vanguard Groups International Inc., in Houston, was listed for three years on the INC. 500.Baker was apparently so busy overseeing such matters as construction of a new headquarters building with a black marble bathroom for his personal use that he didn't even see that his company was sliding into Chapter 11.
Let's be honest: when it comes to lavish spending and converting company assets to personal use, owners of private companies take second place to no one. Gather a few together where they can brag candidly, and you'll hear some surprising stories of what's really behind some of the business expenses they claim on Internal Revenue Service forms. Home computers, cars, airplanes, vacations, lakeside cabins -- it's all very creative.
Public-company CEOs can, and do, pull the same tricks, but they've got more people watching them -- directors, investors, and the SEC. The chief financial officer of a just-gone-public company told me once that his biggest problem was getting the founding CEO to understand that it wasn't "his" money anymore. Terry Jacobs, founder of Jacor Communications Corp., a growing media holding company based in Cincinnati, finds that he can sometimes increase a newly acquired radio station's profitability in the first year of ownership simply by not running the previous owner's boats and cars through the company books. That leaves him more money for, among other things, employee bonuses.
Of all the arguments for staying private, the least convincing is that the decision making is easier -- or better. In the article above, John Oren says remaining private gives him the freedom "to make a successful decision, or even an unsuccessful one, without having to explain it to some analyst." He makes more decisions in the halls, he says, than most companies do behind closed doors. That's nice. But the reason the plainspoken, action-oriented Texan can practice his cowboy-style management has nothing to do with being private or public. He can do it because he's running a $9-million company with just a few hundred employees. Let him try making all his decisions in the hallway when Eastway Delivery Service is a $100-million company with several thousand employees.
That probably won't ever become an issue for Oren because, by choosing to stay private, Oren has probably decided that he really doesn't want his company to be that large. That's not a put-down. It's an assessment based on Oren's own self-proclaimed priorities: a desire for direct, as opposed to delegated, control; an aversion to notoriety and the discomforts of the financial fast lane; a predilection for privacy in personal affairs; a fascination with the equity of growth rather than its pace. These are the sort of issues that impel some founders to keep their companies private. But that's a matter of preference, not propriety.
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