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Why private companies stay private: the FEI research foundation asked senior financial executives of five privately held companies to tell why they stay private. Here's what they said. (Private Companies).

Picture this: It's 9:29 a.m. ET, and you're in New York City, standing on the small stage at the front of the New York Stock Exchange's main trading room--next to Chairman Richard Grasso himself. With the ceremonial gavel in hand, you're poised to "ring" the 9:30 a.m. opening bell on this, the day your company goes public--with its shares trading on the prestigious NYSE. A CFO's dream? Yes--and no.

For, among the benefits of being a public company--the ability to raise new capital to expand, explore, pay of f debt, acquire other companies and more--many companies make the conscious decision not to go public.

This begs the question: Why do private companies choose to stay private? The FEI Research Foundation asked senior financial executives at five privately held companies to talk about their firms, and explain why they stay private. The companies interviewed represent a range of industries and sizes, and among the common themes for remaining private, each clearly leads to the issue of "control."

Maintain Control

"We stay private to maintain control," says Richard T. (Dick) Forsythe, vice president of finance, secretary and treasurer of Eggers Industries Inc. Two Rivers, Wis.-based Eggers Industries is a manufacturer of architectural wood doors and plywood.

"We have made a conscious decision to stay private, and it is even in our mission statement, says Forsythe. In fact, he adds, "We never even discuss the issue of going public."

Eggers' craftsmen have been working with wood for over 100 years. The company is organized as a Subchapter S corporation, which limits its number of shareholders to 75, and taxes them in a manner similar to a partnership. (Taxable income flows to the shareholders, who are then taxed at their individual tax rates.)

Forsythe lists, as the benefits of working for a private company, certain things he "does not have to do:"

* Chase quarterly earnings to appease investors and Wall Street analysts.

* Spend a lot of time and money doing road shows to raise capital.

* Worry about insider trading scandals, which are so popular today with the media.

Like most other privately held companies he knows of, Forsythe says that Eggers is run for the long term, and not to manage short-term earnings. He sees this as a challenge for some public companies. "There is a lot of pressure for public companies to increase quarterly earnings. Some executives bow to this pressure to produce short-term results to keep the stock price up."

This is not the case at Eggers. Forsythe says, "We focus on growing the business, not on growing the stock price."

One issue that Eggers does have to deal with as a Subchapter S corporation is the lack of liquidity of its shares. This issue affects shareholders who might look for a quick turnaround of their investment. Forsythe explains that the share price used when shareholders sell and buy shares is based on an independent valuation of the shares. But these valuations discount the price heavily because 1) there is not a large market for the small holdings of individual shareholders without a controlling interest, 2) the regulations surrounding ownership qualifications of Sub S companies, and 3) due to restrictions imposed by shareholder agreements, since each Sub S company has its own shareholder agreement.

For these reasons, increasing shareholder value is more focused on keeping the company viable for future generations rather than share price.

Pride of Ownership

"We stay private because of pride of ownership," says Stanley C. Smith, vice president, finance, of Mechanical Equipment Co. Inc. (MECO). Based in New Orleans, MECO was founded in 1928 by John E. Pottharst. The company operated as an equipment distributor until World War II, when it began manufacturing water purification equipment for the Defense Department Pottharst's son, John Pottharst Jr., and grandson, John III, led the company's transition to the manufacturing of engineered products for water purification, but both were killed in an airplane accident in the 1970s.

Today, MECO is the world's leading supplier of water purification plants to the healthcare industry for the production of various drugs and intravenous (IV) fluids, and provides water purification solutions for a number of other industries. George Gsell, the nephew of John Potthaarst Jr., is now president of this family-held business, and is the only family member still employed by the company. However, other family members serve on MECO's board of directors.

Smith has worked for publicly held companies in the past, so he is able to discuss the pros and cons of going public with the family members, but they have never expressed any interest in changing the C corporation family ownership structure.

MECO does not have specific hurdle rates to exceed when considering new products or investments. Management makes investment decisions based on marketing potential, not by the "numbers crunching" of financial analysis. New projects are approved based on their growth potential, not on their effect on next quarter's earnings per share, Smith contends.

One of the few drawbacks to being privately held, Smith notes, is obtaining financing for new projects or expansion. With this type of company. some financial institutions might ask the owners to personally guarantee the financing package, but Smith has been able to finance expansion through bank lines of credit secured by assets.

He says that the family wants MECO to remain private because it has a strong loyalty to its 150 employees. "When we have to, we make the tough decisions," says Smith. He adds, "However, our decisions are not guided by short-term profit fixes. If we went public, there would be more 'bosses' and people making decisions about employees, products and investments. This could change the entire character of the company, and the family could lose its pride of ownership."

The Visionary Entrepreneur

"Our owner is a visionary entrepreneur on a quest to realize his dream," says Ridge A. Braunschweig, executive VP and CFO of Orion Corporation and FEI's current chairman. Based in Grafton, Wis., Orion is a privately held manufacturer of hydrodynamic bearings and machined die-cast components for industrial applications.

When Charles P. La Bahn, Orion's chairman, CEO, president and primary shareholder, acquired the Harris Corp. in a leveraged buyout (LBO) 34 years ago, it was renamed Orion Corp. after the Greek mythological hunter. It is now organized as a Subchapter S corporation with eight shareholders who are all related family members. With La Bahn at the helm, Orion has achieved compound annual sales and earnings growth rates of 15 percent and 20 percent, respectively.

"Successful entrepreneurs have a vision that they pursue with a passion. When you have an actively-engaged owner, it is easy to keep the focus of the business aligned with the owner's vision," Braunschweig says. "Because we do not have to meet Wall Street's earnings forecasts, we can make decisions for the long-term benefit of the company and its stakeholders. A good, solid, consistent rate of growth over time is more important than short-term quarterly earnings results."

He explains that Orion is well capitalized and financially solid, and that expansion or additional capacity, as well as keeping current with the latest technology, is financed through internally generated earnings. Orion did an acquisition several years ago through an LBO, using a combination of cash, bank debt and financing by the sellers.

Braunschweig concedes that Orion faces stiff competition--and one of its direct competitors is a unit of a large conglomerate with deep pockets. "Right now, business is very challenging; markets have softened and competition is tremendous," he says. Orion must work more efficiently today than ever before to stay competitive, adds Braunschweig, citing the constant struggle to maintain profit margins sufficient to provide a reasonable return for stake holders and to generate adequate cash flow to support current and future operations. "To remain successful, we must compete on quality, integrity and price."

Maintain Corporate Culture

"We want to maintain the employee-owned culture of our company," says Richard A. Schrader, executive VP and CFO of Parsons Brinckerhoff Inc. (PB). Founded in 1885, PB is one of the oldest continuously operating engineering firms in the world, and is now a leader in consulting, engineering and design-build for all types of infrastructure. It has more than 9,000 employees in more than 250 locations on six continents.

When William Barclay Parsons started the company in 1885, one of his early projects was designing and building New York City's first subway. Henry M. Brinckerhoff, an inventor of "third rail" technology, joined Parsons in 1906. and for the next 90 years, the small firm was run as a partnership. By the mid-'70s, there were 12 partners and about 600 employees.

The company was then converted to a C corporation so it could retain earnings for growth. PB implemented a KESOP (Key Employee Stock Ownership Plan), and today over 1,000 employees are shareholders under this plan. When shareholders retire, they must sell their shares back to the company, as only active employee shareholders are permitted to own shares.

While shares are valued at book value and do not pay dividends, they are sometimes used to help pay for acquisitions. "In the construction industry, the vast majority of companies are privately held," Schrader explains. "When we want to acquire a private company, we will pay with cash and notes, and as a retention device, as well as deal consideration, we may offer shares to key managers who will join our company."

Since PB competes with some large, publicly owned corporations based in the U.S. and Europe, Schrader concedes that having limited access to public capital could sometimes be a disadvantage, especially since the industry is highly fragmented. "There are a number of trade-offs," Schrader says, "but the culture associated with employee ownership fits well with professional services. It also allows management to adopt a long-term view financially because the drivers are ownership stability and long-term earnings growth, rather than quarterly earnings."

"Why Would You Want To Go Public?"

This is the response from John B. Yahres, VP finance and treasurer of Southworth Co. Founded in 1839 and based in Agawam, Mass., Southworth has a 160-year history of fine papermaking craftsmanship.

Organized as a C corporation, Southworth now has over 60 shareholders, mostly members of an extended group of families, now in their sixth generation of ownership.

As with other private companies, Yahres says his focus is on current cash flow and long-term growth of shareholder value, not next quarter's earnings. "Internally-generated funds satisfy most of our cash needs, but we do borrow both short-term and long-term through a bank credit facility." So, he keeps a close watch on working capital, to make sure that receivables, inventories and payables are under control.

"Our business issues are the same as those of public companies, [but] ownership issues are different." So, for example, the value of the stock is an issue for Yahres. It is difficult to value the shares, he explains, because there are a limited number of transactions each year--sometimes none.

Another significant difference from public ownership is that the pride of owning family-related stock is a key motivation for share retention. Yabres asks, "If, as a private company, you have the funds available to support a financially sound business plan that benefits all stakeholders, and can focus on a long-term improvement strategy, it seems reasonable to ask, 'Why would you want to go public?"'

William M. Sinnett is manager of research for the FEI Research Foundation. Dick Forsythe, Stan Smith, Ridge Braunschweig and John Yahres are members of FEI's Committee on Private Companies (CPC). For more information on the CPC, contact Bob Shepler, manager of government relations in FEI's Washington, D.C. office, at
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Author:Sinnett, William M.
Publication:Financial Executive
Geographic Code:1USA
Date:Oct 1, 2002
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