Black businesses woo hungry investors.

Crunch time came last December for Robert Johnson, after less than three months as the chief executive of a freshly minted public company. The first two months seemed almost too perfect. News of the BET Holdings Inc. initial public offering (IPO) had taken the business community by storm. The offering raised $72.3 million, increasing Johnson's personal wealth by $6.4 million, thanks to the sale of 375,000 of his own shares in the company. Investors, including many middle-class African-Americans, bid the stock up from $17 to $26.37 a share. Johnson, 45, was well on his way to becoming Wall Street's latest entrepreneur celebre--the CEO and controlling shareholder of the first black-owned company on the New York Stock Exchange (NYSE).

Then came the conference call between Johnson and stock analysts on the afternoon of Dec. 16. The analysts' question seemed simple enough: Was viewership of Black Entertainment Television (BET), the black-oriented, cable-programming subsidiary of his company, eroding? Of course not, said Johnson. Then, the analysts asked, why did BET report reaching only 27.5 million homes at the time of the offering, while A.C. Nielsen Co. (the television-audience research firm) counted 31.6 million last summer?

That question was enough to trigger a crisis of faith in his company--and panic among BET Holding's new shareholders. It took Johnson several days to clarify the discrepancy (BET counted only paid subscribers to the cable network while Nielsen's numbers included new subscribers enjoying temporary free service). Meanwhile, shareholders were bailing out left and right: The stock's price plunged to $15 a share.

Fortunately, Johnson never lost his composure. He understood that his job was no longer just managing a media company. As CEO of a publicly held concern, he was also required to manage investors' perceptions of the operations in order to protect the value of his company's stock. "It was just a question of newness to the marketplace and our inexperience, initially, in answering the kinds of questions they were phrasing," says Johnson. "Once that was resolved everything was fine. By the time my plane touched down in Anguilla, where I vacationed several days later, the stock was back up around $19 to $20 a share. And by the time I came back in January, it was up around $23 or $24 a share."

Bob Johnson's experience illustrates two important lessons for anyone considering an IPO. The first is something every CEO of a publicly traded company knows: Going public is not a destination, but a potentially lucrative, often dangerous journey--and the first step, the IPO, is often a doozy. The second is a caveat learned first-hand by only a handful of African-American entrepreneurs: The term "first black" doesn't mean a damn thing on The Street.

Despite the inherent risks involve in going public, IPOs are making a strong comeback--there were 402 last year, by far the most in any year since the stock market crash of 1987. And if the recent IPOs of BET Holdings Inc. and Granite Broadcasting Corp. are any indication, black-owned companies may be ready to stage a stock market comeback of their own, after several hit-and-miss attempts during the 1980s.

Last October's offering of stock in BET Holdings, the Washington, D.C.-based parent company of BET and Emerge and YSB (Young Sisters & Brothers) magazines, was the most successful IPO ever by a black-owned company. Wall Street was amazed when the 4.25 million shares of BET Holdings stock, initially offered at $17 a share, were oversubscribed to the tune of 54 million shares.

Three months later, former Wall Street investment banker W. Don Cornwell, 43, completed a $24 million IPO of stock in Granite Broadcasting, a New York-based company that owns four network-affiliated television stations. Cornwell's company, No. 18 on the 1991 BE INDUSTRIAL/SERVICE 100 list, had 1991 revenues of $40 million. Granite sold 3.45 million shares of stock at $7 a share--this despite being in an industry hard hit by a slump in advertising revenues.

IPOs Bounce Back

Thanks to low interest rates and investors' preference for vehicles promising higher returns over fixed-income securities, there's more money available to finance IPOs. According to Securities Data Co. Inc., a Newark, N.J.-based firm that tracks public offerings, more than $25 billion was raised through IPOs in 1991. This was up from post-crash lows of 213 IPOs, which raised just over $10 billion, in 1990 (see chart, "IPO's Rebound," this article). So far, the resurgence of IPOs shows no signs of slowing down in 1992. In January, Securities Data reported 46 IPOs, which raised $2.27 billion in capital. That compares with 26 completed during the entire first quarter of 1991.

The darlings of the latest wave of IPOs are small-cup companies (valued at between $50 million and $1 billion) with strong brand names and near-instant name recognition, such as Riddell Sports, Monroe Muffler/Brake repair shops and BET. Many in the investment community also expect companies in cyclical businesses--such as Granite Broadcasting, which is counting on a rebound in broadcast advertising revenues--to better their performance when the long-awaited economic recovery takes hold.

A February proposal by the Securities and Exchange Commission (SEC), if adopted, could make it easier for smaller companies to raise money in capital markets by reducing capital requirements and simplifying financial disclosure forms. And in March, the SEC gave the American Stock Exchange (AMEX) permission to list smaller, newer and more speculative companies. These changes could steer more black companies toward IPOs. Historically, however, the few IPOs of black-owned companies have met with decidedly mixed results.

Baltimore-based Parks Sausage Co. became the first black-owned company to go public, completing a $1.5 million IPO in 1969. Parks Sausage stocks were traded on the National Association of Securities Dealers Automated Quotation (NASDAQ) exchange until 1977, when the company was taken private by white investors. NASDAQ is home to over-the-counter stocks. In 1980, the company returned to black ownership (Parks is ranked No. 35 on the 1991 BE INDUSTRIAL/SERVICE 100s list), but has remained privately held.

Shortly after the Parks IPO, also in 1969, Chicago-based Johnson Products Co. joined the AMEX by completing a $6.5 million offering of stock. The ethnic hair care products company--the nation's 26th largest black-owned concern--remains the only publicly traded company (ticker symbol: JPC) on the 1991 BE INDUSTRIAL/SERVICE 100s list.

The next IPOs by black-owned companies did not take place until the early 1980s. In 1983, Ault Inc., a Minneapolis manufacturer of products for technology companies, joined NASDAQ, raising $9 million with its IPO. Also that year, Milford, Conn.-based PKS Communications Inc., a manufacturer of telecommunications systems, joined the NASDAQ exchange with a $2 million offering of stock. And 1984, American Shared Hospital Services (ASHS), San Francisco-based diagnostic and therapeutic health services company, completed an offering of 800,000 common shares, raising more than $4 million. While both Ault and ASHS are still publicly traded (the latter on the AMEX), PKS folded after a severe shortage of working capital forced it from the NASDAQ exchange in 1985.

The next attempts to go public by black companies had two things in common: Both IPOs featured celebrated African-American entrepreneurs--and both were unsuccessful. In 1987, Chicago-based Lawson National Distribution Co., a provider of products and services for the public transportation industry, filed with the SEC for an offering of more than one million shares of common stock. Lawson National's founder and president, Daniel C. Lawson, had achieved national prominence by establishing his business as the fastest-growing, black-owned company in the nation in 1985 and 1986. Also, the IPO would have been the first to have a black-owned investment banking firm, Daniels & Bell Inc., as lead underwriter. However, Lawson National's IPO was aborted when the loss of a critical $70 million contract with the city of Chicago triggered a $33 million decline in revenues.

Lawson National filed for bankruptcy in 1989, the same year that the nation's largest black-owned business, New York-based TLC Beatrice International Holdings Inc., attempted an IPO which would have raised about $95 million. Only two years earlier, TLC Beatrice CEO Reginald F. Lewis had completed the landmark $985 million leveraged buyout (LBO) of the international food processing and distribution empire. This time, however, Wall Street did not cooperated. A poor reception from the investment community, combined with a discouraging economic climate, forced Lewis to withdraw the offering. "The perception was that Drexel's people were trying to cash out," says Lemuel L. Daniels, an associate director at Bear Stearns & Co., referring to the beseiged Drexel Burnham Lambert. Drexel served as investment banker for the TLC Beatrice LBO.

And so, BET, not TLC Beatrice, would become the first black-owned company on the NYSE. However, many Wall Street experts are betting that it won't be the last. In fact, Raymond J. McClendon, vice chairman of Pryor, McClendon, Counts & Co. (PMC), a black-owned, Philadelphia-based investment banking firm, says PMC is attempting to persuade several BE 100s companies to consider IPOs--with PMC as an underwriter. "The BE 100s list is the prime source from which the African-American IPOs of the future will come," says McClendon.

All The Right Ingredients

A company must demonstrate quality in six areas in order to do a successful IPO and maintain investor confidence: management, earnings, balance sheet, industry, operations and reporting. These quality factors, according to Philip Taggart and Roy Alexander, the authors of Taking Your Company Public: Red Lights & Green Lights For A Go/No Decision (Amacom Books, New York, $75), are known as the "Six Qs." The demonstration of these factors was critical to the BET and Granite IPOs.

Robert Johnson got the idea for developing BET while serving as vice president of government relations for the National Cable Television Association (NCTA). After reviewing a proposal for a cable channel aimed at elderly viewers, the Freeport, III. native got permission to adapt the proposal for black viewers. In 1979 he got a $15,000 personal loan and began looking for financial backers.

Using his contacts from the NCTA, he approached John Malone, CEO of Tele-Communications Inc. (TCI), now the nation's largest cable company. TCI purchased $180,000 in BET stock and also advanced the company a $320,000 loan. Johnson later convinced Time Inc. (now Time Warner Inc.) and Taft Broadcasting Co. (now Great American Broadcasting Co.) to invest, leaving him with 51% of the stock.

With investors securely in place, the fledgling cable network grew steadily during the 1980s. Using tapes of black college football games and music videos as its staples, BET slowly proved that niche marketing would be the future for cable television.

By October 1991, the Six Qs were in place. The network had shown phenomenal five-year growth. It was broadcasting to 31.6 million subscribers over 2,400 cable systems, and revenues had increased to $50.8 million, up from $35.8 million the year before. Its balance sheet had minimal debt and its operating cash flow and net income were growing at 88% and 77% annual rates respectively.

Industry conditions were promising. Cable television continues to siphon market share away from network television. Meanwhile, according to the Cable Bureau of Advertising, cable advertising increased by 18% in 1991. Market conditions were right. The Dow Jones Industrial Average had shown staying power after breaking the 3,000-point level during the summer and the IPO market was flourishing. And there was an incentive to cash out. Great American, one of BET's investors, needed cash to settle outstanding interest payments from an earlier LBO, and BET needed money for expansion and to retire past debt. "We happened to be the right story at the right time," says Johnson.

Bear Stearns, Los Angeles and First Boston Corp. underwrote the sale of 4.2 million shares (21%) of BET's stock (ticker symbol: BTV). Cincinnati-based Great American sold its entire 2.4 million shares in the company for $40.9 million. BET sold 1.5 million shares for $23 million. Johnson still owns 4.5 million publicly traded shares worth an estimated $104.5 million and 4.8 million Class C shares that are not traded, but which give him control of 56% of the voting stock of the company. Denver, Col.-based TCI owns 18.1%, and New York-based Time Warner owns 15% of BET's stock.

"[The BET offering] shows that the general public and Wall Street are receptive to minority businessmen so long as their business makes sense," says Daniels of Bear Stearns. "If you have a good business plan, they're going to invest in you."

First Boston equity research analyst Mary Kukowski forecasts that "over the next three to five years, [BET's] revenues should grow in excess of 20% annually, operating cash flows 30% and earnings 40%." She says this will be largely the result of scheduled increases in cable operating fees, more new subscribers due to operators upgrading channel capacity, increased advertiser focus on reaching the black consumer market and the company's low cost structure.

BET has another advantage. "The trick with cable programming in this day and age is to make sure that you can get on cable systems," says Keith Gleeson senior investment analysts at Minneapolis, Minn.-based IDS Financial Services Corp. "If two of your biggest shareholders are the two biggest cable operators in the country, that gives you a leg up on access. The cable companies want to see you succeed because they have money tied up in you."

Broadcast News

Granite Broadcasting Co. came to the public market through the strength of its management team and sheer determination. After working 17 years for the New York-based investment bank, Goldman Sachs & Co. (the last seven as the chief operating officer of its corporate finance department), W. Don Cornwell left to pursue is love of broadcasting. He teamed up with Yale Law School graduate Stuart Beck to form Granite Broadcasting in 1988. Since its formation, the company has acquired four television stations: the San Jose, Calif.-based ABC affiliate KNTV-TV, the Fort Wayne, Ind.-based ABC affiliate WPTA-TV, the Peoria/Bloomington, III.-based NBC affiliate WEEK-TV and the Duluth, Minn.-based NBC affiliate KBJR-TV. UNC Ventures,a Boston-based black-owned venture capital firm, talk-show host Oprah Winfrey and Goldman Sachs were the initial investors in the company.

Granite's IPO would be a tougher deal than BET's offering. While acquiring the stations, Granite had accumulated some $110 million in debt. The company had $8 million in losses i 1990 and $7 million in losses during the first nine months of 1991. And although the market was ripe for IPO activity, broadcast issues on the stock market have taken a beating over the last year because of the sluggish television advertising market.

Despite the odds, Cornwell's savvy allowed him to pull the offering through. His experience on Wall Street was invaluable. Unlike what happened with BET, Cornwell was able to communicate very effectively, bolstering investor confidence. Even with two previous of losses, he was able to point out that in 1989, Granite's management team increased net revenues by 5.6%, decreased expenses by 5.5% and increased cash flow by 27%. In 1990, net revenue increased almost 10%, expenses were down 3% and cash flow was up more than 33%. Although further advertising cutbacks reduced Granite's cash flow 9% in 1991, Cornwell convinced investors that the company had reached a cyclical low and his fiscal management skills had Granite poised for expansion and growth as the recession eased. "When earnings are down, some view it as the time to buy," he says. "Anybody--magazines or broadcasters--that relies on advertising as a revenue source, had a tough row to hoe last year."

Although originally priced in the $8 to $10 range, Granite's 3.45 million shares of non-voting stock traded at $7 a share. The stock is listed on NASDAQ system under the symbol, GBTVK. The $24 million generated by the offering helped Granite pay off debt and put it in a position to continue its acquisitions of media properties. The offering left Cornwell in control of 55% of the voting stock and his partner, Beck, with 45%. All other shareholders, including talk-show host Winfrey, own nonvoting shares of stock. "It's important for me to be publicly owned," says Cornwell. "Investors need to be able to get in and out if they don't like how I am doing. I needed more capital, so I had to give people that option."

Now Comes The Hard Part

Getting the actual offering done can sometimes be the easiest part of going public. It is what happens after the offering that will determine whether it is truly successful or not. For instance, what happens to Granite if advertising takes longer to rebound than anticipated? And how long will BET's advertising be dominated by "infomercials," which, to the chagrin of cable operators fill one-third of BET's airtime?

Is going public worth the trouble? It depends on who you ask. BET's Johnson sees IPOs as critical if black-owned businesses are to continue to grow and increase their influence in the mainstream of American business. "Black businesses cannot grow into the next century without outside capital," he asserts. "Unfortunately, all of the capital we need is not in the black community. There's plenty of capital in the corporate debt and equity markets."

However, George E. Johnson (no relation to BET's Johnson), the founder of Johnson Products Co. who took the company public as CEO more than two decades ago, is less than enchanted with IPOs: "Once you take that step, it is the beginning of the process of taking control [if your company] out of your hands."

The following are a few of the advantage of going public:

* Easy access to capital. Unlike borrowing money which must be repaid with interest, the sale of stock provides permanent, noninterest bearing capital which can be used to pay off debt, finance acquisitions or as working capital. On the other hand, selling stock also increases your personal wealth and net worth, making it easier to borrow money.

* Control. Public shareholders usually play a passive role in company affairs. Other sources of financing, such as venture capital, may mean a loss of autonomy.

* Prestige and a broadened customer base. Public stock generates more interest from your customers, suppliers, shareholders, employees and potential employees. Every shareholder is a potential customer for your business.

And then there are the drawbacks:

* It's expensive. Figure on spending about 10% of the total offering (which came to about $7 million for BET), plus legal, accounting and registration fees, printing and mailing costs, key person life insurance and money spent on investor relations. Companies may also spend as much as $500,000 or more annually to meet ongoing reporting requirements for as long as they remain public.

* Everybody knows your business. As part owners of your company, investors have a right to know. Unfortunately, public disclosure can also benefit your competitors. "When companies got to look at our financial data," says former Johnson Products CEO Eric G. Johnson, "it was apparent that our company was very profitable. People who were not already involved in ethnic hair care became very interested when they looked at our margins." (Eric Johnson resigned as CEO in March. See "JPC Regroups After Family Row," In The News, this issue.)

* Loss of control. If a large enough percentage of the company is sold, public shareholders can gain control of the company.

* Pressure to maintain growth. Shareholders expect you to deliver. Unless you have a convincing explanation for slow growth, the value of your stock could fall through the floor. It's easy to be pushed around by the investment community. For example, shareholder dissatisfaction with Ault Inc.'s performance forced company founder Luther T. Prince to step down as CEO in 1985.

Eric Johnson's father, George, prints out that since investors are in it for the money, investor and business priorities may clash. Decisions such as increasing advertising or research and development, which may be in the long-term interest of the company but also reduce short-term earnings, may be rejected by shareholders. He says: "I had to listen to people who didn't know a damn thing about my business."

The negative notwithstanding, most observers agree that more IPOs are in the future for some black businesses. As they continue to diversify and grow, more black-owned companies will show up in industries favorable in the eyes of Wall Street. And many of the new generation of black entrepreneurs bring the necessary management and finance experience to communicate more effectively to the investment community than pioneering entrepreneurs such as Parks Sausage CEO Raymond V. Haysbert Sr. and George Johnson. "As we get more better-educated people in the business area]," Haysbert asserts, "they are looking toward the public market to do the level of work necessary to compete."

Bear Stearns' Daniels says BE 100s CEOs such as TLC Beatrice's Lewis are not out of the IPO picture. "Since his first IPO attempts, Lewis has come to the market with public debt and shown that he can manage the company and increase its revenues," says Daniels.

Bob Johnson believes that black entrepreneurs must change their focus as they challenge the next frontier. "The first thing that has to change is the idea that there is something special about being 100% black-owned and controlled," says Johnson. "What it really boils down to is nobody has control. If Procter and Gamble, Chrysler and Ford pull all their money out of black magazines, what does control mean? Our control point is our ability to get them to advertise. You are in control as long as somebody is paying you money to do business."

Haysbert agrees. "You've got to think big to be talking about a $100 million company or a billion-dollar company," says Haysbert. "If you've got any manacles on your mind, and the main one is the sense that 'I want t control it all,' you just won't to do it. Do you want to be very successful or do you just want to be the boss?"