Going Public

Profile of a company going public and the costs and benefits that apply.

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The anatomy of an initial public offering

The process of going public is not as mysterious -- or as costly -- as many private-company owners think. In fact, despite such hurdles as having to switch underwriters in midstream, an expensive delay due to an unexpected audit, and the shock of last October's Crash, Alan S. McKim, CEO of Clean Harbors Inc., swears he would do it again. Let's use McKim's quest for "Other People's Money" to take a look at some of the costs and benefits of becoming a public company. -- R.A.M.

On November 24, 1987, barely four weeks after Meltdown Monday, Clean Harbors Inc. boldly sold 1 million shares of its common stock to outside investors. In so doing, the seven-year-old environmental-services company changed from a private to a public corporation, and its founder from a Street-unwise innocent who had spent nine hectic months putting the initial public offering together to a contented multimillionaire with a well-financed enterprise to grow.

The transmogrification did not come without a price. For the Massachusetts-based company (symbolized as CLHB on NASDAQ), that price was a palpable $750,000. To it, however, you really should add another $13 million -- the sum that to all intents and purposes was snatched from the CLHB treasury when, on October 19, fate gave CLHB founder and chief executive officer Alan S. McKim what is known in the money trade as a haircut.

It wasn't entirely his fault that the CLHB offering was one of a mere handful of companies to go public in the month after the market collapse. If everything had progressed as planned, CLHB's deal would have gone off a few weeks before, when the IPO window was still wide open. It met unexpected delays, though, and the issue didn't pass through unscathed. The Crash had instantly fried the staple that makes public offerings possible -- Other People's Money -- and McKim had to make severe concessions to ensure he got some of whatever OPM was still available. "One reason we went," he explains, "was to prove we were a viable player in the industry and in the market." More important and less macho, OPM would go a long way toward reducing CLHB's long-term debt -- by then more than $11 million, and most of it personally guaranteed by McKim.

In attracting sufficient OPM to enhance YOM -- Your Own Money -- there are two basic strategies: 1) promise to return it eventually, thus bonds; 2) keep it and don't promise anything, but convey a piece of the action, thus common stock; and, recently, 2a) convey a piece of no action. Not only have this decade's eager investors been willing to donate to businesses with no product, such as biotechnology companies, but to businesses with no business, such as blind pools. Despite the evident eagerness of OP to part with their M, many a private company chooses to remain private merely to escape the prospect of anonymous shareholders peering over its shoulder. Of course, such is the privilege of public ownership, however fractional, and cutting the hoi polloi in is an undeniable cost of OPM. Other than that, though, OPM comes with no strings attached -- once you learn the ropes.

Learning them, warns McKim, is an arduous process. "When the costs start building -- accountants, lawyers, printers -- you begin to have second thoughts. 'I'm supposed to be doing this to raise more money, not to spend more money.' " Even as the bills pile up, though -- or because they're piling up -- it's worth seeing through to the end. "The experience was like being pregnant," surmises McKim in rapturous retrospect. "Every day for nine straight months it was on my mind. Then suddenly one day, it happened." Until that day, CLHB shares had not been freely exchangeable, nor was there an unarguable dollar value that could be assigned to them as collateral or as currency in acquisitions and other dealings. Now, there was.

From the company's founding in 1980, Alan S. McKim had brought Clean Harbors to $46.7 million in revenues for fiscal 1987 with no outside financing other than conventional bank loans. That spring, he decided to consolidate CLHB's expanding position in the competitive industry by going after equity investments. Actually, equity investments went after him. Along with visible growth inevitably come blandishments from venture capitalists and investment bankers, eager to help with such financing. From a passel of eager representatives of both camps, McKim began negotiations with venture capitalists he felt willing to sell part of his company to, and interviewed investment banks capable of underwriting a public offering for late summer or early fall.

On August 19, he formally concluded the private placement, selling about 18% of the company to some venture capital investors in Boston for $5 million. Cost: dilution of his percentage of ownership, theretofore 100%. And he got more than just money. "The firm helped us choose an underwriter, and they brought us credibility," McKim acknowledges. "Now an underwriter could say, 'Here's a company that also has recently done a private placement with a reputable firm, so they must be a good company.' " The same source of credibility became important as a sales pitch at the other end as well; potential customers for the stock could see that professional money managers had been involved prior to the offering.

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