Staying Private: Why pulling my IPO was my best business decision of my career
It was the age of irrational exuberance. I start with that notion because I remember then Fed-chair Alan Greenspan’s words ringing in my ear, as I prepared my presentation and walked into a crowded room at the Intercontinental Hotel in New York City. There were 300 financial companies represented in the ballroom, and the J.P. Morgan-underwritten, Oppenheimer-supported initial public offering was seven times oversubscribed.
Only moments beforehand, in hushed tones in a small ante room, I had been told that given declining market conditions, expectations would need to be tempered – financially, by as much as 20 percent off the initial offering price.
There wasn’t a lot of time to process this, knowing hundreds of expectant people were on the other side of the door. But I proceeded into the room anyway, and gave my presentation on why Computer Generated Solutions, Inc. was a first class, well-run company poised for growth for the 21st century. Listening to my own words about the quality of our business, and the intentions of its leaders gave me my own answer. By the time I was finished, I had made my decision. There would be no IPO.
Now we call the years that immediately followed the tech bubble. Hundreds of companies’ valuations inflated and then popped – and even once-quality companies were disassembled and sold for parts. By 2002 the NASDAQ was at less than a quarter of its value at its peak only a couple years earlier.
Hindsight is 20/20 but the decision I faced then was a difficult one because an IPO had a great deal of advantages in the late 1990s. Certainly there were those executives looking for a quick personal payday but the reasoning for those leading high-quality companies was to scale globally. The cost of borrowing in the late 1990s was nearly prohibitive. Prime rate touched 9.5% as Greenspan sought to temper a red-hot economy, and this made business loans very costly. The ability to grow a business through financing was therefore very limited. But an IPO could provide the jumpstart necessary to scale globally and some CEOs simply felt forced to go to public markets just to compete or sustain growth.
At the time, it was a very difficult decision for me. But I think that same decision would be much easier to make today.
Twenty years ago, as many as 675 companies went IPO in a single year. In 2015, that number was 120. I think that is because today’s private company CEO can access many of the same resources and capabilities as the public CEO, without all the disadvantages. Today, the cost of capital is near historic lows – prime rate is at 3.5%. Companies can gather capital without giving up equity or control to public markets. And the myth that you need to be public to be global has been put to rest – some private companies, such as Mars, Incorporated or the National Football League, are the biggest in their industries.
Other advantages to remaining private were similar then but perhaps not as pronounced. Even before Sarbanes-Oxley and Dodd-Frank, public companies have been more highly regulated than private companies. In my opinion it has worsened, and the cost of assuring and proving compliance is now astronomical and represents a particularly heavy burden on smaller- and medium-sized public enterprises. It’s a very demanding process and, in many respects, it holds back growth.
I’m also glad we didn’t go public that day because I might not have been able to lead my company in the same way. A public company CEO must serve the investors foremost, and a focus on investor value also means a CEO is forced to place a disproportional emphasis on quarterly and annual returns, rather than on making the sometimes costly decisions necessary for sustained long-term growth. A public company CEO must worry about activist investors, hostile takeovers, even media scrutiny. A private company CEO can choose each investor on his/her own.
I believe that as a private company CEO, I’ve been able to take a longer view than the CEOs of some publicly traded competitors, and we’ve executed our vision and strategy without having to publicize them to the marketplace. I have led my company into geographies where we were the first in our market to establish a presence, which might have looked risky to some public boards of directors, but proved to be innovative, yielding a competitive advantage. I’ve been able to follow my instinct and business acumen to make quick decisions, resulting in some important acquisitions that we might not have landed had we waited on the processes now associated with public companies.
A private company’s chief executive can and should also run the company with the same discipline as any publicly traded entity and the good news is that technology speeds this process. Establishing deep financial controls, analytics, management involvement and senior-level transparency around financial results is vital. The best private companies’ CEOs enforce governance via audited financial statements and monthly, detailed analyses of the business. They lead formal bottom-up budget development processes and create discussions, debates, consensus and adoption. They do what the best public companies do, except they don’t publish their results to the world.
As mentioned before, a private company’s CEO can still access major capital and do the big deals. Because my company has been profitable for over 30 years, we can self-finance many investments and acquisitions. But I do have another option in this low-interest-rate environment; even cash-flush private companies are choosing to issue bonds to access capital at extremely low cost. Unilever is an example of a global, private company that sold zero-coupon bonds this year while maintaining net operating cash flows in the billions.
And even for those CEOs who helm companies where they or ownership may be seeking to take some chips off the table, there are ways to do it without going public. Taking investment from private equity (PE) companies can help you accomplish this while simultaneously bringing in financial expertise to take you to the next level. While capital may be cheap, relative to history, the right partner with a very well-defined financial and operational strategy could lead to explosive growth. To be successful here, choosing the right PE partner is absolutely critical – there simply aren’t enough well-run, profitable businesses to go around, so a private company CEO has the leverage to find one interested in true long-term partnership rather than a short-term payout. From there, probably the hardest thing for any leader to reconcile is giving up some of the decision-making power and trusting in the partner.
In all, I’m grateful that I went with my instincts 20 years ago and stayed private – it was my best career decision. And whether considering control and effectiveness, ability to innovate, even growth potential, given the current economic climate, my money remains on staying private.
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Phil Friedman, President and CEO, CGS (Computer Generated Solutions).
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