Private Dreams

Stung by a neglectful stock market, not-coms are feeling the temptation to go private, and unlock the value they say Wall Street has ignored.

Last fall, John Perrotti, CFO of Gleason Corp., was in a sour mood. It wasn’t his business. Sure, sales and proÞts at the Rochester, New York-based gear-component maker were down from the previous year. The whole machine-tool industry had seen customer orders drop in mid-1998. But the situation was not nearly as bad as the stock market seemed to think.

The company’s shares had barely budged since plunging from a peak of $35 to $15 in early 1998. Meanwhile, every week or two, Perrotti could count on another dot-com making its public debut, with little more than an idea and some seed capital, at several times the value of his own business. Indeed, any company with a whiff of technology was either ascending to new heights in the stock market or quickly recovering from a sell-off. Gleason, on the other hand, was being ignored. Its stock, trading at just two to three times earnings before interest, taxes, depreciation, and amortization, was low, even for the downtrodden auto-parts industry.

“When you’re an industrial, cyclical manufacturer, it doesn’t endear you to Wall Street,” says Perrotti, who has spent 14 years at Gleason, the last 5 as CFO. “We weren’t getting a fair valuation.”

Thousands of senior executives at “Old Economy” companies could make the same complaint. Perrotti decided to do something about it. On December 15, he and most of the senior management team joined CEO Jim Gleason in a bid to buy in the company’s stock at $23 per share — a 30 percent premium to the market price.

With equity partner Vestar Capital Partners, a New York-based private equity group, and $180 million in loans from Bankers Trust, Gleason managers decided they would prove the stock market wrong. On February 18, after 72 percent of shareholders tendered their shares, Gleason became a private company with management in voting control.

“We can now devote 100 percent of our energy to making operational and strategic improvements to the business,” says Perrotti. No more public filings, no more quarterly hoops to jump through, and no more demoralizing bull sessions with analysts and frustrated shareholders. And if the new owner-managers succeed, they’ll reap the rewards themselves.

The case for going private has rarely been more tempting for managers in dozens of sectors of the economy. Manufacturers, retailers, distributors, food companies, restaurant chains, financial services firms — for all the attention they’re getting in the public stock market, they may as well trade on the over-the-counter bulletin board. The drubbing of the dot-com stocks this year may have tempered their sense of injustice, but it hasn’t improved the situation. “There is a whole set of companies with enormous cash flows trading at four or five times earnings,” says Larry Shulman, a senior vice president at Boston Consulting Group. “Their managers think they’re doing things right, but the stocks are not responding.”

So the managers are. In the first nine months of this year, 189 public companies, with a value of $32 billion, have been bought out by private investors, according to the newsletter Buyouts. And with money still pouring into the private equity market, more undervalued companies will likely choose to leave the public market behind.


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