The Year of Dealing Dangerously
From mergers to IPOs, today's small businesses have a daunting number of possibilities before them. Here are five big deals that winners from the 1997 Inc. 500 have made since appearing on the list.
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Should I merge? Go public? Sell out? That's the biggest decision any founder makes. And as these members of last year's Inc. 500 discovered, it's never simple
Deals, deals, and more deals. never before has so much action been centered on so many young businesses. And as companies on this year's list are tempted by offers of funds to feed their three- or four-digit growth, they are likely to be pursued by more suitors than ever before.
While the once-white-hot market for initial public offerings has cooled, nearly one-quarter of the companies on this year's list expect to be public by the year 2000. Grabbing countless headlines of late have been mergers and acquisitions. While those deals have most often involved multibillion-dollar pacts between the likes of banks or telecommunications companies, the huge amount of capital looking for decent returns has led to a record number of smaller deals as well.
The numbers tell the story, says Richard Peterson, an analyst at Securities Data, the clearinghouse for M&A trend information. In 1992 M&A deals involving companies with less than $100 million in revenues totaled $17.3 billion. The dollar amount grew consistently over the following years. By 1996 the value of small-company deals had reached $37.7 billion.
But no one quite expected what happened in 1997--a 66% spike in dollars--Peterson says. Securities Data recorded 1,679 deals last year, totaling $62.5 billion--a record in terms of both volume and value. As for this year, the total dollar amount of M&A deals surpassed 1996's total of $37.7 billion several months ago, Peterson says. This year may not set another record, but it will certainly be a blockbuster.
For CEOs, the choices can be overwhelming. "Selling a business is such a big distraction emotionally and otherwise," says Russell Robb, an investment banker who specializes in selling small manufacturing companies. "A lot of companies get so wrapped up in doing a deal that the business deteriorates, and the CEO winds up being a sad puppy." But that's after the fact. Beforehand, the possibilities are limitless.
Vic Odryna is one Inc. 500 president who hopes to find himself swimming in the deal pool by the end of the year. Odryna runs PixelVision Technology Inc. (#450), a company that makes flat-panel displays. "I've got a broker hired," he says. "The market for my product is exploding, and that's my biggest problem. We need fuel."
The experiences of some of last year's alumni suggest that the biggest problem facing Odryna is determining exactly what kind of deal is right for PixelVision. Responses from last year's CEOs, chronicled here, range from "It's better than we expected" to "It's been a disaster." At the least, their stories suggest that Odryna--and others like him--would do well to proceed with a dose of caution.
Getting Hitched
Company: PhotoDisc, #10 in 1997
Deal: Merged with competitor
Goal: To link its distribution technology with better-quality images
Outcome: Merged company dominates a growth industry and gets love letters from analysts.
Drawback: How powerful is a cochairman?
Sometimes old money and new money can get along. That's been the experience of Mark Torrance, the 52-year-old founder and CEO of PhotoDisc, a Seattle-based supplier of stock photo images. PhotoDisc's management team had been seriously considering an IPO for the summer of 1997. But Torrance was afraid that the small-cap stock would get lost in the shuffle. "It's hard for a $100-million company to get attention in this market," he says.
Thankfully, a suitable alternative presented itself. While preparing for the IPO, Torrance was contacted by another Mark--Mark Getty, grandson of oil tycoon and art patron John Paul Getty, and cofounder of Getty Communications PLC. Getty's outfit was based in Britain but traded on NASDAQ. Getty, formerly an investment banker, reports that he became aware of PhotoDisc's value through his company's market research. "That research made it very, very clear to us that it was important to know them and, if possible, join forces," Getty says. In the summer of 1997, the two Marks negotiated much of the PhotoDisc-Getty merger personally at Getty's family home near Siena, Italy.
Both companies sold stock photography to advertising agencies and publications. PhotoDisc's specialty was technology; it delivered images to a large number of customers via CD-ROM and the Web. Getty Communications' forte was in quality and exclusivity--the company sold certain pictures only once. Though its images were of higher quality, they were distributed in an antiquated format--Getty shipped transparencies to its customers.
By February 1998 the merger was completed. A new U.S. company--Getty Images Inc.--replaced Getty Communications on NASDAQ. Getty's company received 19 million shares of stock, and PhotoDisc got approximately 8 million shares plus $39 million in cash. The total deal was valued at roughly $240 million. The Torrance family owns 17.5% of the new company.
Analysts approved heartily of the marriage because the new company links PhotoDisc's novel distribution technology with Getty's valuable content. And Getty's seasoned senior management also sits well with Wall Street. Though Torrance managed PhotoDisc to 7,195% growth between 1992 and 1996, he has taken a backseat to Getty Images CEO Jonathan Klein--who sits on the new company's three-person executive committee along with board cochairmen Torrance and Getty.
"That's a bit of a ticklish subject," admits Torrance, who nevertheless says he's comfortable with the new arrangement in which Getty has an upper hand. "It's a trade-off, as are many things in life." He claims that his rapport with Klein and Getty is solid, even though he's in Seattle and they're in London. And he says he's happy focusing on strategy and research and development rather than on day-to-day issues.
Torrance's contract with Getty Images runs out in February 2001, as does his noncompete agreement should he decide to leave, but he plans on being active in the company for quite some time. As for the present, Torrance says he's wrestling with a quandary every entrepreneur covets. "You don't think about it in the thrill of the chase," he says, "but liquidity brings with it a whole new set of problems."
Getting Ditched
Company: Scrip Plus, #4 in 1997
Deal: Sold option to buy business to division of large corporation, with long-term consulting agreement tied to profits
Goal: To finance the growth of capital-intensive business
Outcome: The option to buy was exercised sooner than expected.
