The Pain and Pleasure of the Private Life
Someone is still looking over your shoulder
Wall Street doesn't like bears-not even profitable teddy-bear firms, the shareholders of Vermont Teddy Bear finally realized last year. So they accepted a private-equity firm's offer of $6.50 a share, a premium over the previous trading range of $4 to $6.
But the first year's estimated savings of $300,000 was overwhelmed by more than $1 million in consulting and legal expenses. And when she does the books, CEO Elisabeth Robert says, "there is just as much pain in my office-it is just a different pain." The pain now is more productive. The scrutiny of new owners the Mustang Group "is much more targeted on how you can improve the business as opposed to 'Have you satisfied the lawyers?'" Robert says. That frees her gift-delivery business workers to think up fresh ideas such as offering a bouquet of flowers in a silk hatbox.
Executives at companies that have gone private say trading public investors for private ones has both surprising costs-and benefits. Checkers Drive-In Restaurants had to drop its stock-matching incentive program for rank-and-file workers. And CEOKeith Sirois reports to bankers monthly instead of to shareholders quarterly.
But five months of private operations have also generated plenty of perks for the chain of Checkers and Rally's burger joints, Sirois says. The company has already saved hundreds of thousands of dollars in stipends and stock options for board members.
Wall Street will immediately dump a stock that doesn't meet quarterly expectations. Yet private investors, such as those at Wellspring Capital Management, which arranged the Checkers deal, typically say they will keep their money in a company for three to seven years. But they can also be demanding and quick to make sweeping personnel changes.
And some deals actually endanger the target companies. Investors in the proposed $17.6 billion buyout of Freescale Semiconductor plan to borrow so much money that the company would have to pay $836 million a year in interest, estimates James Grant of Grant's Interest Rate Observer. But, he notes, Freescale wasn't able to generate that much cash from its business in three of the past five years. And Grant doubts the new investors could improve the business enough to make the high debt payments. "They are not the only subscribers to the Harvard Business Review," he scoffs. Freescale officials wouldn't comment.
Such cautionary tales have made some executives wary of private-equity bids. At InfoNow, a small, publicly held business software company, CEO Mark Geene turns down a couple of offers a month from private investors attracted by the low stock price of 20 cents a share. "They are bottom feeding" and aren't offering anything close to what he and other shareholders think is the true value of the company, which reported $6.8 million in revenues for the first nine months of 2005, Geene says. Instead, he is taking a play from the private-equity book: He has pulled InfoNow's stock off the regular markets and stopped providing public financial reports. That has saved at least $100,000 a year in accounting and legal fees and, Geene says, has given him the freedom to make needed but painful changes.
This story appears in the December 4, 2006 print edition of U.S. News & World Report.
advertisement
