Some examples of changes different companies made in order to go public and comments from some managers.
Your compensation's too high, your 'buddies' have to go, and your personality needs an overhaul. The makeover, part two
F orget the polo ponies. And the $6-million house in Hawaii. If you're thinking of going public, it probably won't shock you to learn that your balance sheet won't be able to harbor such "marketing expenses" anymore.
What will surprise you, though, is the number of complaints your new top advisers -- the underwriters, accountants, and lawyers charged with preparing your private company for its new public image -- will have about you.
Like what? Here are some examples of the kinds of criticism you can expect:
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You're not getting paid what you're worth -- anymore As you prepare to take your company public your underwriter might decide that some of your people are grossly overpaid. Like, say, you.
So discovered Dr. Seth Flam, the chief executive of FPA Medical Management (#27). Underwriters Hambrecht & Quist and Oppenheimer & Co. made him slash his salary in half, from $444,000 to $222,000, and cut the other company officers' pay by at least 50%. But Flam remains philosophical about his newly indigent state: "We're going to make a lot more from the appreciation in our equity than we ever would from wages."
Flam's pay hit was peanuts compared with the one taken by Jim Jannard, the high-flying president and chairman of Oakley Inc., the sunglasses maker. Jannard's immoderate 1994 bonus of $21 million shrank to a niggling $1 million when Oakley went public. Worse yet, the management had to ground its private fleet of corporate jets -- dubbed the "Oakley air force" by some insiders -- to appease Wall Street.
A little foresight, though, can help companies avoid any unexpected last-minute adjustments. In the year prior to going public, Isolyser Co. (#34), a medical-products manufacturer, acquired several companies whose managers had lofty salaries. "Those salaries would raise eyebrows on any prospectus," observes CEO Robert Taylor. The solution: Isolyser included salary "buy-downs" in the acquisition prices, overpaying up front so it could list relatively low salaries on its books.
But such fancy financial footwork won't let you dance around the remuneration issue entirely. "When you go public," warns Flam, "there will always be a discussion about your own compensation."
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Don't change a thing about your personality. Change everything You probably knew that to go public, you'd have to balance your books. What you probably didn't know, though, is that you might have to balance them on your head.
To smooth its clients' rough edges, underwriter Donaldson, Lufkin & Jenrette Securities packs executives off to a sort of charm school, Jack Franchetti Communications Inc. The eponymous instructor, a former public-address announcer for the New York Mets, videotapes executives practicing their road-show song and dance. "Many businesspeople drop their eyes and don't have energy in their voice, and to an audience, there's a lack of credibility," he says. "An audience might infer that they're afraid to tell the real story."
If his prescriptions have a My Fair Lady ring -- "strong eye contact, strong facial expressions, proper pace, proper inflection of the voice" -- he also tries to ensure that clients, like Eliza Doolittle, make a suitably elegant appearance. Here, Franchetti says, tact is everything. "You don't just tell someone, 'You don't dress well, your hair is too long, you have dandruff.' You have to point it out on the videotape. You say, 'Gee, that tie certainly gets real dizzy on camera.' Or, 'Gee, you have a striped suit on with a striped tie. Maybe we can go with more of a paisley.' "
David Purcell, chairman and CEO of Encad Corp., learned better behavior the hard way. When he got to the part in his road-show presentation about how his company would use the proceeds of its initial public offering, he clicked to slides of a speedboat, a sports car, and a man playing golf. To his horror, nobody laughed.
Luckily, it was just a dry run. In any case, Purcell got the message. "I now have to be particularly guarded," he says.
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You're OK, but lose those friends you call colleagues There was some sadness at seeing him go," admits Don Lee, CEO of Unison Software Inc., recalling how his longtime chief financial officer departed as part of a pre-IPO management shake-up. "But we just needed someone with more experience in handling public companies."
It can be the most sobering element of a makeover: axing old hands from the management team, including lawyers and accountants who have been with you from the start-up days.
Take the case of LeCroy Corp. The electronics-instrumentation company deals with some pretty arcane projects, like sending a giant magnet out on the space shuttle to detect proof of the big bang. It was all very exciting to the company's technically oriented management team, but its chairman was well aware that Wall Street would be less impressed with astronomical mysteries than with astronomical revenue growth and profits.
In preparation for the October 1995 IPO, he hired a more down-to-earth businessman as CEO and jettisoned several of the scientifically proficient -- but commercially challenged -- managers, including the president and chief of marketing. "I'm sure not everybody at the company is happy with the changes," admits Lutz Henckels, who is now LeCroy's president and CEO. But the previous management, he adds, "wouldn't even have known what matters to a Wall Street audience. When our underwriter asked us all those probing questions" -- What is your inventory turnover? Why are accounts receivable collected so slowly? -- "they would have said, 'Why does that matter?' "
As painful as such switches may be, the rewards can be handsome. David Pomije, founder of Funco Inc. (#32), reports that after he hired a professional management team in preparation for taking his company public, its valuation soared from $3 million to $20 million in six months -- proof that a little change can bring in a nice chunk of change.