More Northwest companies likely pondering whether to go public

By Drew DeSilver
Seattle Times business reporter

John Hall, chief executive of Rainier Pacific Bank, is clear about why, after more than seven decades as a credit union and then a mutual savings bank, the Fife institution should become a publicly traded company: It needs the cash.

"Your ability to grow the institution is really predicated on the amount of capital you have, and our only source of capital" is annual profits, Hall said. "It's kind of precast us into a slow-growth model — after 70 years we have only a half-billion in assets."

John Holt, chief executive of Cobalt Group, is equally clear about why, after about two years as a public company, the Seattle software company is better off under private ownership.

"If you tell (Wall) Street you're going to grow at 15 percent, you damn well better grow at 15 percent," Holt said. "I don't spend one ounce of energy right now trying to make the quarter look good, because that's not how I get measured."

Cash or quietude; liquidity or flexibility. Those are the choices more Northwest companies are likely to be making.

With the stock market in a six-month rally, the market for initial public offerings (IPOs) is sputtering to life after what, until recently, had been an exceptionally quiet period.

More companies (22) filed to go public in August than in any single month since April 2002, a Seattle Times analysis of Bloomberg data shows. Twenty companies — including one Northwest company, AMIS Holdings of Pocatello, Idaho — have gone public so far in the third quarter, five more than in the entire first half of 2003.

However, new IPOs are entering a market much different from the one that lofted such dot-bombs as Network Commerce and Homegrocer.com.

Investors are far more skeptical of startups that are long on story and short on profits — many pending IPOs are in such exciting, glamorous fields as banking, insurance and real estate. And, Congress and federal regulators have imposed stricter — and costlier — rules governing public-company operations. Those changes may combine to persuade some companies that being public isn't worth the time, expense and scrutiny.

According to FactSet Mergerstat, a firm that tracks merger and acquisition activity, 79 companies had filed with the Securities and Exchange Commission to go private from January through August, compared to 59 in the same period last year and 97 for all of 2002.

Before AMIS' successful offering Wednesday , there hadn't been a Northwest IPO since Quinton Cardiology Systems in May 2002. Besides Rainier Pacific, one more Northwest company has filed to go public: Seattle-based American Seafoods, a fish harvester and processor.

Conversely, two Northwest companies had been weighing management proposals to go private, but both offers were pulled recently.

Firoz Lalji, chief executive of Renton-based Zones, and his investor group offered $1 a share to take the computer reseller private. But the offer sparked a lawsuit by other Zones shareholders, who claimed Lalji's group was trying to buy the company on the cheap; earlier this month, the group withdrew its offer.

In Portland, an investor group led by chief executive Scott Wallace had offered to buy all of Gardenburger's outstanding shares for 50 cents apiece. (The company was delisted from the Nasdaq in March 2001 but continues to trade on the OTC Bulletin Board.)

"The management buyout group was unable to reach agreement with the company's major investors and creditors regarding the terms" of a deal, the company said in a statement two weeks ago.

The money machine

Say what you want about the stock market, there's one thing it's very good at: raising large sums of money fairly quickly and in an orderly manner. As Rainier Pacific's Hall said, "How else am I going to get $80 million in capital? It took us 70 years to get to $42 million."

Obtaining cash for growth remains the biggest reason companies go public, said Paul Malatesta, a finance professor at the University of Washington Business School: "The principals would love to keep the company to themselves, but in order to harvest the fruits of their endeavors, they need to bring in outside investors."

Private companies, of course, have ways to raise cash as well — from traditional bank loans to venture-capital and private-equity firms. But still, private companies often have less ready access to investment capital than their public brethren, said David Roberts, a principal in The Rainier Group, a Bellevue consulting firm. Once a company goes public, Roberts said, its financing options expand: It becomes more attractive to venture capitalists and private-equity firms because they can more easily sell their stakes. It can also issue other kinds of securities, such as preferred stock or convertible notes, which are exchangeable for common stock.

On the other hand, if a company is in a mature industry with few prospects for growth, it makes little sense to go public, said Sheryl Hildebrand, managing partner of Deloitte & Touche's Seattle office.

"It has a lot to do with what the company's future growth plans are — the idea that 'we've got a couple of ideas we haven't been able to exploit because of access to capital,' " she said.

And if a slow-growth company is throwing off a lot of free cash, Malatesta said, management's energies would be better spent husbanding that cash flow than seeking out risky growth opportunities. In such cases, he said, going private makes sense.

A company may go public for any number of other reasons: to restructure its ownership (as American Seafoods is doing), pay down debt (AMIS Holdings) or raise its public profile (any numbers of late-'90s high-tech startups).

Another big reason companies go public is to allow early investors — whether a venture-capital firm or your Uncle Fred, who paid for your first $10,000 of inventory — to pocket the profit they've made.

But that presumes a liquid market — that the stock is actively traded, there are many shares on the market, and investors can sell their stakes without causing the price to plummet. Without a liquid market, a company loses out on one of the main reasons for being public in the first place.

Tukwila-based Lindal Cedar Homes found that out a few years ago. The company first sold shares to the public in 1971 to fund growth plans, chief executive Robert Lindal said, but the founding family retained majority ownership.

Over the years, Lindal said, the company was successful and profitable, but found itself overshadowed by bigger businesses in more exciting fields.

"Though we grew a bit, we didn't grow big enough," he said. "We were what was referred to as an 'orphan public company.' We had a great story to tell, but no one was listening."

The combination of small size and heavy insider ownership discouraged brokerages from following Lindal Cedar, which in turn meant few outside investors knew about the company. As a result, trading volume was very thin: In the three months before Lindal Cedar announced its plan to go private, the average daily volume was just 6,273 shares.

Outside oversight

Holt, at Cobalt, said one of the biggest differences between being publicly traded and privately owned is how much time and energy he had to spend wooing investors. Holt estimated that, at the height of Cobalt's tenure in the stock market, he spent at least one week a month on investor relations, "road trips" to meet with brokerages, public relations and keeping up with regulatory filings. Now he does almost none of that.

"It's the difference between having 5,000 shareholders versus fewer than a dozen," said Holt, who along with a few other executives retains a small stake in Cobalt. Most of the company was bought by Warburg Pincus, a private equity firm, in 2001.

"You don't have some little old lady in South Dakota with 10 shares who thinks she should be able to get the CEO on the phone," he said. "A lot of the complexity and workload have just vanished."

The workload increased, especially for smaller public companies, with the passage of the Sarbanes-Oxley Act last year. That law was meant to address some of the failures in accounting and corporate governance that helped bring down companies like Enron and HealthSouth.

Along with SEC rules, such as Regulation FD, and new rules from the major stock exchanges, Sarbanes-Oxley has increased the amount and types of information that must be disclosed to the public, and forced public companies to tighten their internal financial systems and recordkeeping policies.

All of that, of course, costs money. When Cobalt was taken private, Holt said, it saved about $750,000 a year in compliance and promotion costs; if the company were going private now, he said, the annual savings would be more in the neighborhood of $3 million.

Regulators aren't alone in looking over a public company's shoulder. SEC reports are full of information, from segment revenue to research-and-development spending, that can give competitors clues about what you're up to.

The Rainier Group's Roberts recalled one client that had developed a particular food product that was twice as profitable as competing products. Had the client been public, he said, it would have had to disclose the unusually high profit margin, which would have inspired competitors to target it; as it happened, the client enjoyed eight or nine years of lush profits before the competition began to catch up.

And, he noted, while it can be easier to manage private companies for the long term, it can also be easier to confuse a company's best interests with those of its owners or managers — particularly when they're one and the same. Also, if things go bad for the company, public shareholders absorb much of the pain — companies can and do survive, and occasionally even thrive, after being delisted.

All in all, Holt said, going private was the right move for Cobalt in November 2001, but so was going public in August 1999.

"There are some advantages" to being public, he said, "but the list is a lot shorter than they told us when I went to MBA school."

Drew DeSilver: 206-464-3145 or ddesilver@seattletimes.com

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