No sooner had some Inc. 500 companies made this year's list than their founders sold the business or took it public

Given the pre-April dot-com lovefest that smote both the public and the private markets, it's no surprise that in 1999 the value of merger and acquisition deals and initial public offerings among small companies hit record highs. And despite the market correction this past spring, the figures for the year 2000 will probably be even higher, says Richard Peterson, an analyst at Thomson Financial Securities Data, headquartered in Boston.

But dot-coms are not the only corporate animals to benefit from the abundance of riches. Among this year's Inc. 500 winners, terra firma outfits like ASK Data Communications (#423), a $16-million provider of remote-access and security services to the computer industry, and (#220), an $11-million Internet service provider, found themselves being snapped up in eight-figure deals. On the IPO front, the financial gains were just as astonishing, if not more so. For example, shares for $23-million Witness Systems (#88), a developer of customer-interaction-recording software, had a gain of 100% on the first day out and netted the company $76 million. Market activity for SpeechWorks International (#44), a $14-million developer of speech-recognition systems, almost made that look like small change: its share price rose 184% on day one, and the company walked away with $95 million.

Why are Inc. 500 CEOs choosing to cash out when their companies are seemingly at the height of their powers? The responses range from the obvious -- to finance growth -- to the not so obvious. "A lot of company owners are into the chase," says ASK Data president Robert Keller. "I'm more into the victory. From the minute I opened the company, I knew that at some point I wanted to sell it." Here are some snapshots of CEOs who have just crossed the finish line.

CEO/President: Max Oyler
Company: Kelmax Equipment Co. (#212), headquartered in Decatur, Ga.
Business: Manufacturer of metal racks and shelving for the food-service and supermarket industries
Deal: Sold to Leggett & Platt Inc., based in Carthage, Mo., a $4-billion manufacturer of residential and commercial furnishings
Goal: To finance growth without going into debt

When Max Oyler, 53, started Kelmax Equipment Co. with partner Frank Kelly, in 1995, the plan was to build a successful business by customizing a product that their former employer had been treating as a commodity. The idea of an exit strategy never crossed their minds. But as the company grew -- by some 25% to 30% annually over the past few years, with revenues reaching $9.8 million in 1999 -- they knew they'd have to either bring in cash or forgo certain growth opportunities. "Getting major financing would have run counter to our philosophy," says Oyler. "We borrowed some money from a bank in the beginning and when we opened our Southwest operation, because the expansion put a squeeze on our cash flow, but we didn't want to go into debt again. We were afraid that if the economy went south, we wouldn't be able to recover."

To advise them on the sale, the founders brought in the Geneva Cos., a business broker headquartered in Irvine, Calif. Although the eventual buyer, Leggett & Platt, had been eyeing Kelmax as a possible acquisition for about two years, Geneva initiated a limited marketing campaign so that at least five other suitors would enter the fray. "We wanted to see if we could get a bidding war going on us," says Oyler. In the end two companies put offers on the table.

Neither Leggett & Platt nor Kelmax will disclose the exact sum of the deal, but Geneva vice-president Jeff D. Herndon reports that the price was "less than $25 million in cash," which he claims is "at the high end or a little above" what privately held companies with financials like Kelmax's normally sell for -- around four to six times their pretax income. The transaction also included a three-year earn-out agreement.

At this early stage of the game -- the deal closed on July 10 -- the only downside that Oyler sees to the cash-out is that the partners no longer have the final word in making decisions. "Now all capital equipment, for example, requires three quotes and has to be properly approved," says Oyler, who remains president of Kelmax Equipment, now a division of Leggett & Platt. "But then, we probably needed that discipline in the past."

Oyler adds: "Before, we could see our investment in the company growing, but that didn't mean anything until we could actually rake it in. The sale has taken the chips off the table and put them in the bank."

CEO/president: Mitchell Jones
Company: W2Com (#162), in Dayton, Ohio
Business: Long-distance data carrier that puts long-distance-learning packages together for large companies
Deal: Sold to Arel Communications and Software, based in Yavne, Israel, a $13-million public software manufacturer and video-application service provider
Goal: To retain the company's value in an industry (telecommunications) in which private companies don't flourish

Mitchell Jones made the decision to sell his five-year-old company on the heels of trying to buy somebody else's. "In July of 1999 we set out to acquire some companies, but their valuations were too high," he says. "We decided that if they were worth that much, we would be worth even more." In a different economic climate, the next logical step would have been an IPO, but Jones nixed the idea because the process would have taken too long. "Given the market correction in March," he says, "our timing couldn't have been better."

By January, the $7-million W2Com had retained the investment-banking firm of Morgan Keegan Co., based in Memphis, to handle the sale, and together they came up with a list of 18 companies to send prospectuses to. From the response to that mailing, the team narrowed the list of possible acquirers down to five.

Arel was not the highest bidder among the four companies that offered term sheets to W2Com. Its offer was in the middle. Nor, at 7,000 miles and seven time zones away, was the company the most geographically convenient. But it had the technology muscle that W2Com was looking for. "We didn't look at the financing angle -- we had north of $25 million in capital and didn't need money," says Jones. "We focused on the strategic buyer."

The deal, which closed on August 8, was valued at $29 million. W2Com got $2.3 million of that in cash and the rest in stock (nearly 3.7 million shares, including options and warrants). There's no earn-out agreement, but Jones, 38, plans to sign a three-year employment contract to serve as CEO of the North American branch of the combined company, and he will hold a board seat.

Jones compares the last few days of the acquisition process to the last yard before a touchdown: the distance is short, but the tension is intense. "The negotiations and collective bargaining will wear on one," he says. "You don't sleep. And there's a lot of emotion in giving up something you created from scratch. Starting the company was nowhere near as painful as selling it. Not even close."

CEO: Dave Gould
Company: Witness Systems (#88), in Alpharetta, Ga.
Business: Developer and marketer of software that records and analyzes customer interactions
Deal: Went public
Goal: To raise cash for growth, particularly product expansion and international distribution

Dave Gould hasn't been with 12-year-old Witness Systems long -- he was brought in by the company's venture capitalists, Battery Ventures, based in Wellesley, Mass., just 20 months ago. (Of Witness Systems' three founders, only one, Jim Judson, is still with the company, now as a board member.) But before joining the software developer, Gould, 41, already had the sale of two companies and a bankruptcy under his belt. ("I've been through the good, the bad, and the ugly in the software business," he says.) So he had the wisdom to know that an IPO was the best way to finance the company's international expansion and the development of a new product line. "We're the leader in a very large -- about $8.5 billion -- market, so it was premature to sell," says Gould. "And to fund very rapid growth, it's much more efficient and less expensive to have an IPO than to keep going back to the VC watering hole."

Gould began preparing for the IPO the day he arrived at the $23-million company. He wanted to go public in the first quarter of 2000 and was determined to increase the company's visibility. Unlike many software companies, Witness Systems had a lot of follow-on business from the large companies that made up 90% of its sales, so it knew well ahead of time what its quarterly revenues would be. Gould wanted to do whatever he could to publicize the upcoming growth.

The company went public on February 10 ("just in time," says Gould), led by underwriters Chase H & Q, four months after it began its S-1 filing process. Its stock, which debuted on the Nasdaq national market at $20 a share, ended the day up 100%, at $40, and settled reasonably quickly in the $32-to-$35 range. Witness Systems issued about 4.3 million shares for a total offering of $172 million. The company netted $76 million.

The stock, like so many in its sector, got hammered last spring, sinking to an abysmal $6.50 the first week of April. Gould, who was on vacation sans laptop, learned about the wreckage in an airport in Puerto Rico on his return trip from St. Lucia. By July the price had revived, hitting the $23-to-$24 range, but in early August it sank again, this time to about $15. Gould remains sanguine about the fluctuations.

Nail-biting over the Nasdaq notwithstanding, the company's 250 employees are thrilled that Witness Systems went public, Gould says. "They all had options before, but they weren't worth anything. By going public, we've created liquidity for everyone in the company."

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