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Taking your company public: business finance - 25th Anniversary of the B.E. 100s - Cover Story

Black Enterprise - June 1, 1997

AFTER YEARS OF PLAYING THE LEAD ROLE of entrepreneur, inventor, marketing guru or titan of technology, it's time for your curtain call. You've molded a start-up into a success or rescued a skeletal outfit from doom. Collecting ample reward for the 20-hour days and bouts of endless fretting, you'll cash in on the sweat and strain and at the same time secure a debt-free source of the lifeblood corporations crave: capital. You're taking your company public.

Many CEOs will argue there's no better way to both receive an ovation and ready a corporation for Act Two of its long-term growth. Money brought in by issuing shares can help you vanquish competitors and conquer new markets. It can be earmarked for everything from new computer networking equipment to acquiring a rival with a strategic marketshare. And judging by the initial public offering (IPO) market of the '90s, your timing is impeccable. New company shares have been the rage for investors for much of the decade. Last year was no exception, as the number of corporations going public swelled to 870 from 172 in 1990. More importantly, businesses that came to market brought their bosses $49 billion dollars worth of funds.

So with a mint in investor money to be had--most IPOs raise between $5 and $25 million each--it's hard not to yearn for the day your company's shares make the market. All too often, though, the top brass at budding publicly held corporations gets ample schooling only after they've jumped headlong into what is an arduous process. We see a lot of companies pull out half-way through registration," notes Edsel Guydon, an attorney at the Securities and Exchange Commission (SEC) who says most of the quitters give up because of lack of foresight, preparation or effort. And if that doesn't temper whatever fantasy is luring you toward an IPO, figure it won't be cheap. Between legal and accounting fees and other expenses, you can count on a bill amounting to $100,000 at the very least, and possibly a lot more if you're involving an investment bank as underwriter for your deal.

Guy Davis is finding out firsthand just what a weighty decision it is after all. Seven years ago he tapped his retirement savings to buy a small radiation detection and monitoring concern based in northern Virginia. Shortly afterward, the market ballooned for his investment, Proxtronics Inc., which in short order increased revenues well over 10-fold to $900,000 a year.

Success like that has prompted a horde of outsiders to come knocking on Davis' door, each with an agenda to pursue. Venture capitalists, for instance, are promising bundles of money Davis could well use to upgrade software and install expensive new scanning technology to get an edge on the competition. "One came here, was impressed and began talking about a deal in short order," Davis recalls, "The terms sounded good, but he wanted control, almost to the point of making day-to-day decisions." Davis is convinced that going public will allow him to remain in the driver's seat and get the money he needs to go head-to-head with bigger rivals the likes of Siemens. Still, he's quite wary.

"I'm anxious," he says, "but I don't see us getting to that next level until 1998 at the earliest." For now, Davis is taking pivotal steps toward the big day ahead by contracting an independent auditor to monitor business data and hiring a full-time accountant as well.

So is he missing out by being so cautious? Not necessarily. While indications are the IPO boom has cooled already by mid-March this year 121 new issues had hit the market, a sizable number compared with 1990. So why wait? "We typically find that from the point management starts mulling over a stock issue, a company needs to set aside one to two years to get its house in order and really prepare for going public," says David Sylvester, a senior partner at the Washington, D.C. law firm of Hale and Dorr, who's worked on six IPOs in the last 18 months alone.

Even so, you're not guaranteed automatic access to investors. Anthony D. LeCour, a managing director at Utendahl Capital Partners, says a mere two or three of every 10 companies his company works with actually end up issuing shares. The rest opt for financing of another sort or, in some cases become so discouraged by the rigors involved that they give up.

By now, a generation of African American entrepreneurs has survived the process with varied success, ever since Parks Sausage Co. lead the way with an offering in 1969. Reginald F. Lewis, the late financier, managed to pull off close to a $1 billion leveraged buyout of consumer products behemoth TLC Beatrice, but couldn't convince Wall Street to support a $95 million IPO in 1989. George E. Johnson, founder of Johnson Products Co., rued the decision to go public, especially as his control of the hair care products manufacturer eroded over time.

Robert Johnson, chief executive of BET Holdings, ran into a bit of rough going when he went public in 1992. When analysts became fixated on minute details of the operation, the stock market socked BET shares when company projections didn't jibe with Wall Street expectations. Not that BET came out the worse for the experience: In becoming the first black company on the New York Stock Exchange, the Washington, D.C. broadcaster's IPO raised $72.3 million.

PROS AND CONS

Weighing your choices? True enough, going public has quickly become synonymous with joining the business elite, a definite plus. Value judgments aside, it's a source of working capital, and an avenue to myriad other types of finance. Proceeds can go to everything from outfitting a sales force with new computers to buying out a competitor. Using shares as collateral can shave points off interest you pay creditors in the future. And of course, if your stock does well, it's the perfect way to thump your chest before all your peers.

W. Don Cornwell, CEO of Granite Broadcasting Co., a former BE 100s company of the year, says going public in 1992 has opened up a number of financial options. "Having shares outstanding gives our company equity value and that comforts the financial markets," says Cornwell, whose company owns and operates television stations around the country. "And if we were private we couldn't access the debt market as easily as we do."

Despite the obvious perks--the name recognition, the infusion of capital--going public isn't just about cashing in on the market and looking brilliant. Large institutional investors and shareholders on down to shy, retiring widowers all want earnings growth now, yesterday, and tomorrow. That also means a number of new "owners" will hold you to delivering good numbers as soon and as often as you can, a fact that's bound to in some way compromise your long-term goals. And don't expect all new shareholders to be passive investors. For one, even when management keeps a majority stake, the big financial institutions like mutual funds and pensions snatch up to 60% to 70% of the shares outside of management's control, with another third going to high-net worth individuals, according to Utendahl's LeCour. Neither group is likely to shrink if company results are less than cheery.

Then there's the whole issue of financial records and statements filed at the SEC. You'll now have a host of backseat drivers--reporters, union officials, competitors, neighbors and relatives alike--who can use government documentation as a window onto the inner workings of your company.

If that doesn't fit the picture you've had in mind, remember there are other options should you decide the public route isn't the most palatable, or if you want to nurse your company along a bit before taking the plunge.

Consider Dr. Mabel Phifer, not that she's ever been one to sit on a good idea for too long. In 1981, she launched the International Telecommunications Consortium (ITC) and began broadcasting training seminars by satellite to college administrators. Sixteen years later, the suburban Washington D.C. company now telecasts college lectures from one campus to another nationwide and two years ago won a contract to beam the Million Man March around the globe. Phifer soon stands to make millions on a deal with the Pentagon, under which she'll supervise a program that will help military personnel complete college degrees long distance via satellite television.

You might think Phifer could just sit back and entertain offers from investment banks far and wide. Wrong. Before tackling a full-fledged public offering, she's looking at alternatives.

CHOICES, CHOICES

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