Off the Street

Stricter rules and wary investors are prompting more companies to exit the public markets.

The result? Bright Now spent the next four years combining businesses and installing an integrated information system. Meanwhile, the market’s focus on top-line growth forced Monarch to defer such investments and spend capital on additional acquisitions.

By February 2002, that strategy — or lack thereof — had taken its toll. Monarch’s stock was trading at about $1.50, the company was in violation of its debt covenants, and the CEO and CFO had been replaced with a team looking to sell the company. With $80 million in annual revenues, Bright Now bought Monarch ($180 million in revenues) for roughly five times EBITDA. “Their operations proved to be extremely competent, but because they hadn’t integrated, they weren’t able to do what they did best,” says Schmidt.

Schmidt says he has full support from his investors to spend the next 12 to 18 months integrating Monarch’s businesses and installing Bright Now’s platform. “The one big benefit of the private sector is that you end up with a business partner instead of a shareholder,” he says.

That’s a common sentiment. “People say it must be nice being private — you don’t have to report to a lot of people,” says Klock. “That’s a misconception. I have a dozen institutional people I report to every month and three different VC firms.” The difference, say private-company executives, isn’t the level of reporting, it’s the nature of the relationship. “It always amazes me to sit in on analyst calls for public companies and realize the questions are just scratching the surface,” says Schmidt. In Bright Now’s case, he says, he not only meets regularly with investors, he also relies on them “in many respects as mentors.”

Typically, of course, those investors are still looking for some sort of exit strategy — including going public again. But executives at once-public firms don’t seem keen on that idea. While opportunities may arise sooner, says Schmidt, he’s comfortable keeping Bright Now private for the next three or four years while it digests Monarch. If High Falls Brewing needs more money, adds Henderson, “I think there are more than enough places to go besides the public equity markets.” And while going public again is a possibility for Comp Benefits, it probably won’t happen before 2005. “That’s assuming there is a capital market,” says Klock.

In the next few years, there will likely be far more companies dropping out of the public markets than joining them. To steal a phrase from Wall Street, going private is the next big thing.

Sidebar: Going Private…

There are several ways to take a company out of the market, although going private typically involves some combination of the first two of these techniques.

Leveraged Recapitalization Merger. The classic going-private method, involving a proposal to merge with an acquisition company created by management and financial sponsors for the purpose. A special committee of the board typically is established to negotiate, and may feel compelled to solicit competing bids.

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