Going Public

Utz merges into the public market

It seemed as if wedding bells were about to ring.

The love story circulating in 2015 was that the famed, folksy investor Warren Buffett was discussing a possible union with family-owned snack food company Utz Quality Foods of Hanover, Pa. These rumors arose after The Oracle of Omaha told Fortune magazine that his meals sometimes consisted of Utz Potato Stix and a Coca-Cola. Buffett, chairman and CEO of Berkshire Hathaway holding company, is famous for buying companies whose products he loves.

The purported engagement was a just fairytale. Buffett told Fortune soon after that he had contemplated buying Utz, but “it never went anywhere.”

Now, Utz has made a different kind of marriage, after years of gobbling up other well-known snack companies. In August, Utz merged with publicly traded Collier Creek Holdings, a special-purpose acquisition company (SPAC), to form Utz Brands Inc. in a deal valued at $1.56 billion. Utz Brands began trading on the New York Stock Exchange at the end of August.

Utz CEO Dylan Lissette, wearing a red face mask emblazoned with the “Little Utz Girl” trademark, rang the opening bell on the NYSE on August 31.

“We have finally reached the level of critical mass where we had presence across the United States in every geographic region, but relatively low penetration in markets west of the Mississippi,” says Lissette’s father-in-law, Michael Rice, the 77-year-old, third-generation former chairman and CEO. “So there is still tremendous potential for domestic growth.

“To cultivate and harvest that potential at new levels required more capital, which we were able to [obtain] by joining Collier Creek and becoming a public company. They had the experience and wherewithal to help take us to new levels and enable us to better fulfill that potential.”

The Rice and Lissette families still maintain more than 50% ownership of the company’s outstanding shares, says Lissette, 49, CEO of Utz since 2013. The legacy owners of Utz sold only a small percentage of their equity, less than 10%. 

“We believe in the future of the company to such a great extent that we made the migration to a public company so as to continue to put the company in the best position for future growth,” Lissette says.

Utz shareholders were “aligned” about a combination with Collier Creek, Lissette says. Based on 2019 retail sales, Utz was the largest U.S. family-owned producer of branded salty snacks, according to documents filed with the Securities & Exchange Commission.

“Over the last 10 years we had done a significant amount of M&A as we attempted to build out the company to a more national company, expanding our geographic reach as well as our brand portfolio,” Lissette says.

Lissette will continue to lead the company, and the headquarters will remain in Hanover. Lissette and the other family owners, as the largest shareholders, “should ensure continuity as we transition to the public markets and execute our long-term growth strategy,” the proxy-prospectus says.

What the proxy-prospectus refers to as Utz’s “power brands” are the heritage Utz brand; craft brands such as Zapp’s, Golden Flake Pork Skins and Hawaiian; “better for you” brands such as Good Health and Boulder Canyon; and selected licensed brands such as TGI Fridays and Herdez. Listed as “foundation brands” are regional brands Bachman, Golden Flake Potato Chips and Cheese Snacks, Tim’s Cascade Snacks, Snyder of Berlin and “Dirty” Potato Chips, as well as partner and private-­label brands.

Utz’s products can be found in approximately 40% of U.S. households. The company operates 14 manufacturing facilities, and its products are distributed nationally to grocery stores, mass retailers, convenience and drug stores and other outlets.

“I think Grandma and Grandpa Utz would be very surprised as to how far we have come,” Rice says.

From kitchen to major competitor
In 1921, Bill and Salie Utz scraped together $300 to buy a small hand-operated potato chip cooker, peeler and slicer. The entrepreneurial couple began making potato chips in their kitchen in downtown Hanover.

Although friends said Bill was crazy to leave his job at a Hanover shoe factory making $5 a week “for this potato chip thing,” Rice says his grandparents were able to make a decent living from the start.

“Salie cooked the chips and Bill sold them door-to-door,” Rice says.

Later, they set up potato chip stands in farmers’ markets in Hanover, York, Harrisburg and Lancaster, Pa., then branched into stands in Baltimore and Washington. “They obviously had to work hard and mind their pennies, but the company grew slowly, albeit steadily,” Rice says.

Utz Brands is now the fourth-largest U.S. salty snack maker with gross sales of more than $1 billion annually. The company has grown its pro forma net sales at an 8% compound annual growth rate since 2001, or approximately 4% excluding acquisitions, according to SEC filings.

“Over the intervening years, from 1968 until today, we have never had a year when sales did not exceed the prior year, and where we did not make a profit. Some of our strongest years of growth were during the economic downturns,” Rice says.

Still, the Utz of the 21st century has had challenges. A proposed merger with pretzel maker Snyder’s of Han­over in 2009 was shelved after the first and second filings with the Federal Trade Commission failed to receive clearance. Then-CEO Rice said participating in another FTC request would put a strain on the company by distracting it from its core business.

Lissette is philosophical about that scuttled purchase. “I’ve always thought, if you live your life looking in the rear-view mirror, you are going to crash,” he says. “That could have been an incredible combination if it occurred; or it could not have been.”

Snyder’s of Hanover quickly rebounded with a 2010 merger with Lance Inc. That combined company, Snyder’s-Lance Inc., was acquired by Campbell Soup Co. in 2018 for $6.1 billion and today is the country’s second-largest salty-snack maker, behind PepsiCo’s Frito-Lay division.

After the failed Snyder’s merger, Utz went on a shopping spree. Over the past 10 fiscal years, it made 11 acquisitions and took on debt. The merger with Collier Creek allowed Utz to reduce its indebtedness, according to SEC documents.

But Rice, who has competed for years against small and major players, continues to think big.

“I believe our next 10 years can go way beyond the level we attained in the last 100 years,” he says. “These are very exciting times ahead of us.”

New partners
Collier Creek Holdings brings some seasoned human capital to Utz.

Collier Creek is a so-called blank check company that goes public and then acquires a privately held business, enabling it to become public without an IPO. The company was incorporated for the purpose of effecting a merger, according to filings with the SEC. Sponsored by Collier Creek Partners LLC, the SPAC completed its IPO in 2018, raising $440 million.

Talks with Utz began in 2019.

Collier Creek was co-founded by Roger Deromedi, former CEO of Kraft Foods Inc. Deromedi left Kraft in 2006 after serving there for 29 years. He then spent 11 years as chairman of Pinnacle Foods.

The other founders of Collier Creek are Chinh E. Chu, founder and managing partner of CC Capital Management LLC, and Jason K. Giordano, senior managing director of CC Capital Management.

Deromedi is now chairman of the Utz board. “My role as chairman is to support Dylan and his management team, and to help them to make the company even more successful,” Deromedi says.

“My experience and Dylan’s deep expertise in the snack food category is a powerful combination to take Utz Brands into its next 100 years.” Plans call for accelerating growth through marketing and product innovation and further geographic expansion, among other strategies, he says.

The reconstituted board has a majority of independent directors from multiple industries. The new directors have decades of experience in managing and growing companies, Lissette says. There are now 10 board members, including Deromedi, Lissette, Rice and Giordano, a former director of Pinnacle Foods and former managing director of The Blackstone Group.

“We have a great board, made up of legacy Utz shareholders and outside independent directors, some of which were from Collier,” Lissette says.

“We believe [it] will only make us stronger as an organization going forward.”

Lissette says Utz has always been run “in a very ‘public’ way.”

Still, corporate governance at Utz, as a publicly held company, will be very different than it was as a private family business, says Jennifer Pendergast, a professor of family enterprise and executive director of the John L. Ward Center for Family Enterprises at Northwestern University’s Kellogg School of Management.

“The family has given up their ability to control capital allocation,” she says. “Things like dividend levels will be controlled by the board.” Decisions about the company’s 3,000 employees could also be affected.

The family’s role in the new company most likely won’t be publicly known for a few years, Pendergast says. There’s no guarantee that family members will hold onto all their shares, she notes.

“As a family, you can look at the business as an heirloom on one end of the spectrum or as an investment. When going public, the family gives up some control to treat it as an heirloom and moves towards the ‘investors’ end of the spectrum.”

The Utz family heritage
Deromedi apparently thinks highly of how the family has managed the company.

“For Utz to be here after 100 years — becoming a billion-dollar company, going public and now continuing to grow — is a testament to what was achieved through the company’s rich heritage and core values,” he says.

The company seems to enjoy a place in the American consciousness as a family business. After all, one of its products is Grandma Utz’s Handcooked Potato Chips.

Besides the recognition from one of the world’s greatest investors, Utz was featured in an early episode of Mad Men. The cable TV series’ imaginary advertising agency, Sterling Cooper, handled the Utz account. When the fictitious owners of Utz — Hunt and Edith Schilling — showed up to watch the making of an Utz commercial, the couple appeared like sweet provincials. The fast-talking comedian hired to appear in the commercial lets loose a string of shock humor about Edith’s size. Lissette called the episode “fantastic” on CNBC’s Mad Money.

The company’s Little Utz Girl trademark celebrated the founders’ daughters, Arlene and Regina, and “represented all quintessential little girls,” according to Advertising Week 360, which celebrated the logo as a “Pop Icon.”

Arlene Utz married Francis X. Rice, a doctor’s son, in 1936. F.X. Rice joined his in-laws in the Hanover Potato Chip Company “to manage the business detail of the steadily growing operation,” Rice says. He credits his father with doing “a stellar job of maintaining a common bond as well as a strong operating base for the business in his 40-plus years of managing it.”

Rice says mealtime conversations at home featured discussions of what had happened at work that day. “I would say the dynamics of the business were totally woven into our family relationships,” he recalls.

Arlene Utz also worked in the business, beginning as a young girl. The story goes that when a market in downtown Hanover ran out of chips there was no one available to deliver more. Arlene put the chips in her red wagon and made the delivery herself, according to the Evening Sun in Han­over. She served as chairman of the Utz board for 23 years and was known as Arlene Utz Hollinger after she married for a second time. In her 2000 obituary, which was front-page news, the then Utz vice president of human resources praised Hollinger’s solid, consistent leadership and concern for the employees.

Rice continues to serve as a special adviser in addition to his roles as a director and chairman emeritus. He says he loved the business from his first job there in the autumn of 1954, when extra help was needed to store freshly harvested potato supplies in the cellars beneath the manufacturing facility. He was 11 years old.

“Dad asked me if I wanted to help unload the potatoes the local farmers were bringing in. Those potato supplies would be stored for the entire winter and into late April, when the new potato crop from Florida became available,” Rice says. “The storage operation ran from mid-August until the first freeze occurred in November that caused the potatoes to be unsuitable for producing the light-colored potato chips we wanted to produce.” 

From then on, he worked every summer on the “utility crew,” unloading the freshly dug potatoes, cleaning route vans and doing building maintenance, to name a few jobs. It was a great education, he says.

“It gave me a tremendous knowledge of the basics of the business, how things could and should be done to be successful. I think it at least subconsciously inspired in me an appreciation of what it took to make an effective, successful business.”

When founder William Utz died in 1968, Rice’s father asked him to join the business. Rice had graduated from law school and was working as a government contracts lawyer with Control Data Corp. in Washington.

“My ultimate goal by then was to sometime join the business, because I saw tremendous potential to expand the business outside of the very constricted geographic area it then covered.,” says Rice, who moved his family to Hanover.

In 1968, Utz was pulling in just over $5 million in sales and was among the top 10 businesses in Hanover. Rice and his father discussed what could be done to grow the business even faster.

“There were two answers. First, expand into a full line snack manufacturer and expand our geographic area of sales beyond the 100-mile radius from Hanover that we were then serving,” Rice says. “By the early 1970s, we had established distribution centers in Richmond, Va.; Laurel, Del.; and suburban Philadelphia. We also built a pretzel plant in Hanover as the first step in broadening our manufacturing base and product lines.”

Rice became Utz’s CEO in 1978 when his father, F.X., retired. He led the company until Lissette became CEO in 2013. Lissette became part of the Utz family in the early 1990s when he married Rice’s daughter, Stacie.

The company never stopped expanding geographically and now has manufacturing capability across the country.

Rice says his grandfather “was very hands-on and tended to want to keep things under his control and in check.
“But I realized early on that if you wanted to grow, you had to recruit good people and give them a degree of freedom that you can’t totally control. They won’t do everything the way you might do it, but they will do some things better. They will make some mistakes, just as you will, but if they learn from the mistakes, that is fine, and the business will do better and grow faster.

“We have been so successful over these 100 years because our people have been so conscientious, dedicated and loyal. Their efforts are critical to success, and so appreciated. It takes good performance at all levels of an organization to be continuously successful.”       

Maureen Milford last wrote about single-family offices for Family Business Magazine.

Copyright 2021 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.     

Vertex goes public during a pandemic

Executives of any company that goes public will tell you the process leading up to the IPO is grueling. For family-controlled Vertex Inc., which began trading on Nasdaq July 29 under the ticker symbol VERX, the challenges were compounded by the COVID-19 pandemic.

Vertex, based in King of Prussia, Pa., is a global technology company that provides tax compliance solutions. When its employees shifted to working remotely, the company had not yet filed its intention to go public with the Securities and Exchange Commission.

The final work on the SEC filing was done in a virtual environment. Meetings to test the waters with investors and the subsequent roadshow — pitches by executives and underwriters to attract interest in the IPO — took place via webcast and video calls.

“The investment community was used to meeting you in three dimensions. And now they had to do it all in two dimensions,” says David DeStefano, Vertex’s non-family president, CEO and chairman.

The right move at the right time
Vertex Inc. was founded in 1978 by Ray and Antoinette Westphal. Their children, Jeff Westphal, Stevie Westphal Thompson and Amanda Westphal Radcliffe, purchased the company in 2000. They serve on the board and control most of Vertex’s Class B voting shares.

The decision to pursue an IPO was reached in early to mid-2019. “The company has been on an accelerating growth trajectory because there are some very strong drivers in the market that are enabling us to deliver more value to our customers,” DeStefano explains. He cites increased regulatory and technology complexities as significant factors. In 2019, Vertex generated revenues of $322 million.

“We started to realize that having access to more capital, whether it be debt or equity, could enable us to grow faster,” DeStefano says. The board concluded that going public was the best capitalization alternative.

“In our role as directors, we agreed with our board that that was the best way forward for Vertex,” Amanda says.

Professionalization pays off
When they took over the company from their parents, the siblings recruited independent directors with large-cap public company experience.

That decision, Stevie says, has been “the Number 1 thing that’s allowed us to grow and thrive and be in a position to eventually contemplate having an initial public offering.”

Vertex made some shifts in its board structure prior to the IPO. DeStefano became chairman in addition to his roles as president and CEO.

Ric Andersen, a Vertex board member since 2008, was named lead independent director. Andersen, who has more than 25 years of consulting and management experience at IBM, Price Waterhouse and PwC Consulting, is a managing partner at a private equity firm.

DeStefano joined Vertex as vice president of finance in 1999 and later became CFO and executive vice president. In 2016, he succeeded Jeff as president and CEO.

When the board raised the option of pursuing an IPO, a robust discussion ensued about “the appropriate governance to best support the company in a public environment longer-term,” says Jeff, the previous chairman.

“The board concluded, after a very healthy debate and consulting with our third-party advisers, that a CEO/chair with an experienced lead director was an optimal model to ensure best board performance, good governance and leadership accountability.”

The company also engaged new legal counsel and new accountants, DeStefano says. Goldman Sachs and Morgan Stanley were the lead underwriters.

The IPO planning phase
With the adviser team in place, DeStefano and Vertex CFO John Schwab began an extensive process. Working closely with the investment banks, they developed a presentation to investors. They prepared SEC Form S-1 (the initial registration form for new securities), ensuring disclosures were made correctly and facts presented properly.

The Vertex story was taken on the road in two phases: first in “testing the waters” meetings to obtain feedback from the investor community, and then, after SEC approval, in “roadshow” presentations to officially offer the chance to invest.

“That journey takes months of effort and ongoing iteration,” DeStefano says.

In March, while the S-1 was being prepared, Vertex’s more than 1,100 employees were making the transition to working from home. The company assembled a cross-functional leadership team to ensure business continuity and implemented remote protocols for its global workforce.

“The employees pivoted very seamlessly,” DeStefano says. “I was very comfortable after two weeks that the team had the ball.” That enabled him to focus on the final elements of the IPO.

Prospective investors found the Vertex story compelling, DeStefano says. “They were blown away, quite frankly, that Fortune 500 companies were so reliant on who we are and what we do — how sticky the business was, how substantial it was. As I wrote to my employees afterwards, I wasn’t bragging; I was just telling the truth.”

The family’s new mindset
Now that Vertex is a public company, the family has changed the way it views ownership — “thinking about a broader pool of co-owners,” Amanda says.

“Probably the biggest change for us personally is that if somebody’s interested, they can delve into the numbers and figure out a lot more than they used to be able to,” Stevie says. “I think we’re prepared for it.”

The G2 siblings kept the third generation informed. “We were the ultimate decision makers,” Jeff says. “But the kids were right there with us.”

Amanda notes that well before the company went public, it had established a professionalized board that approached governance the way a public company would. “So in a lot of ways, it’s not a big change.”

Opening day
The company priced its nearly 21.2-million-share IPO at $19 on July 28, which resulted in the offering raising close to $402 million in proceeds. Shares closed on the first day of trading at $23.93.

According to Vertex’s S-1, the proceeds will help the company pay down debt and fund some of the $123 million special dividend paid to the Westphals in May 2020. The money raised in the IPO will also finance investments in Vertex’s offerings, technology and sales force.

Like so many other events in the time of COVID-19, the Vertex IPO was virtual. Nasdaq created a two-hour webcast of the opening day proceedings. Nine hundred Vertex employees logged on. They were invited to submit their pictures for projecting on the video display on the exterior wall of Nasdaq’s cylindrical tower in Manhattan’s Times Square.

“Sometimes out of challenging situations, beautiful things actually happen,” Amanda says. “We were all able to share in the bell-ringing ceremony together, not just a small group of people. The folks at Nasdaq did a phenomenal job, explaining to everyone what was happening behind the scenes.”

At Amanda’s suggestion, family members chartered a small bus and traveled to Times Square, eerily deserted because of the pandemic. They stood on a street corner and watched the images projected on the Nasdaq building.

New business partners
Vertex included all its employees in the directed share program, which allows a company that is going public to reserve a percentage of its shares for “friends and family” to purchase at the public offering price.

“We’ve always felt that all of our people were our business partners,” Jeff says. “It’s really nice to formally embrace them in that role.”

“The one moment that really got me to cry,” Amanda says, “was when my cousin’s daughter told me that she was using the money that I gave her for her confirmation to buy Vertex stock.

“My 12-year old little cousin was going to be my co-owner. The responsibility of it feels really different than when it was just us.”

The Westphal siblings say the IPO would never have come about had they not had a solid relationship.

“It’s in a moment like this that the family factor really rises above all else,” Jeff says. “If it wasn’t for our shared devotion to not only the business, but each other, I don’t think we’d take this step forward.”  

Tips from Vertex on going public

Jeff Westphal, Stevie Westphal Thompson and Amanda Westphal Radcliffe, the three siblings who control Vertex Inc.’s voting shares, and non-family chairman and CEO David DeStefano offer this advice for business families considering an IPO:

1. Surround yourself with great advisers. “It’s so critical to have the right set of advisers to both educate you and guide you through certain elements of the minefield,” DeStefano says.

2. Put the right people in your C-suite. “Confidence in the strength and professionalism of your CEO and CFO are absolutely paramount in this process,” Amanda stresses.

3. Have a solid management team in place. “You need to have a team that can run your company while your CEO and your CFO are dealing with the investment community,” DeStefano notes.

4. Develop a pitch that excites investors. Be able to describe why your company is already a success and what its growth potential is. “You need to have a story that resonates with what the investment community is looking for,” DeStefano says.

5. Professionalize your board. Hire independent directors whose expertise will be credible in the public market. “If we hadn’t [already] been striving to govern at the level of a world-class public company for many years, this would have taken numerous years to bring about,” Jeff notes.

6. Engage advisers for the family as a whole. Prior to an IPO, family shareholders will need their own individual attorneys. “So it helped to have some people whose only interest is in the family as a whole rather than one wing or another,” Jeff says.

Copyright 2020 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.     



Creating shareholder liquidity: A checklist before going public

There is now a real investor desire, and even a need, for strong companies to be in the public markets. According to a May 2017 Ernst & Young report, the number of domestically incorporated U.S. listed companies dropped by more than 45% between 1996 and 2016. The amount of cash liquidity in the U.S. banking system is $2.2 trillion, according to Federal Reserve economic data (Dec. 7, 2017).

Going public can be the capstone accomplishment of a long and successful career.

What questions should family business owners be asking in 2018 to determine if they are ready to take their company public?

Question #1. Which has greater priority: maximizing wealth and liquidity or maintaining maximum control?

One will prevail over the other, and it is best to consider this question early in the process.

Illustrative of this is the recent Snap Inc. IPO. The founders retained control through a dual-class stock structure that gave them 89% of the voting power although they held only 44% of the equity. Because of the lack of voting rights, Snap Inc. shares were excluded from the relevant MSCI indices, suppressing the pool of prospective investors.

Question #2. Whose wealth is being maximized, current or future generations?

The more generations, the more important the question. Generational interests can easily diverge, as demonstrated by the separation of the Pritzker family’s assets after years of discord.

Question #3. Who gets a vote on the upcoming direction and process?

This issue must be discussed and ideally settled before the owners consider going public.

Question #4. How will current service providers be handled?

Some of your legal, accounting, tax and estate advisers may be adversely affected. Others may see a windfall. Some will be displaced because of market needs, requirements or lack of qualifications. Long-time advisers may be displaced even if they are highly qualified, and long-term relationships may end up stressed or severed.

Question #5. How will current stakeholders — board, employees, customers, local community — be affected?

You should also consider what weight should be given to stakeholders who are not decision makers. Family employees and long-time executives and board members may be displaced. This issue is highly personal; no single approach is best for every family ownership group.

Question #6. Who should serve on the team that will decide the myriad questions that must be answered regarding which stock exchange to list on and which service providers — investment bank, accounting firm, investor relations firm — to engage?

These six questions are worth bearing in mind whenever a significant change in ownership is contemplated. They are even more important before beginning the process of creating liquidity via going public. Once the above items have been addressed, there is another set of considerations regarding alternatives. There are alternatives to going public via an IPO that may be a better solution for your company.

Liquidity alternatives for family businesses
Private equity firms will often allow business owners far more control than they would have if they took the company public. Of course, terms are highly negotiated, and more than one family founder has been forced out when the company struggled. Private equity and venture capital investors currently a have near-record amount of “dry powder” awaiting investment, estimated to be $638 billion, according to Pitchbook. When PE firms invest capital, they generally plan to grow the company and make it more successful for later sale. While this plan will ultimately require the family to relinquish all ownership, it will enable them to exit with greater wealth than they likely would have been able to realize without the PE partner.

• A sale to an ESOP (Employee Stock Ownership Plan) provides family owner/operators unique flexibility. The sale of all or some of a company’s stock to an ESOP provides liquidity for shareholders as well as incentives for management and employees. Participating employees receive company shares through the ESOP as a retirement benefit. Under Section 1042 of the Internal Revenue Code, shareholders can avoid capital gains taxes when selling to an ESOP if within 12 months of the sale they reinvest proceeds into “qualified replacement property,” such as stocks and bonds of U.S. companies. Within limits, the sponsoring company can deduct the principal and interest payments on the loan the ESOP used to purchase shares.

Special Section: The quest for liquidity

The ABCs of PE

Private equity pros and cons

Family offices: 'Quiet capital'

Succession plans must incorporate liquidity planning for the family

Merging into or selling to another public entity has more certainty of closing a highly negotiated deal. While an IPO can be adversely affected by general market conditions that might make success — or even closing — impossible, a merger/sale is dependent on a very small group of decision makers. Even that risk can be mitigated with “break-up” fees paid should a closing not take place.

• A variation of the above is a special-purpose acquisition corporation, or SPAC. This entity raises a “blind pool” of public capital from investors with the sole purpose of finding a private company with which to merge. The private company management often retains full operational control and majority equity ownership of the now-public company. Promoters of a SPAC list these as advantages over traditional IPOs: (a) The seller will know the price at the beginning of the process. (b) Costs are lower, since the entity is already public. (c) The deal structure is flexible.

• A newer potential vehicle for liquidity is a Reg A+ public offering. This allows startups and later-stage pre-IPO companies to use equity crowdfunding platforms or traditional investment banks to raise as much as $50 million from both accredited and non-accredited investors. Unlike traditional S-1 public offerings, with a Reg A+ offering companies are allowed to test the waters with prospective investors during the approval process, eliminating the “quiet” period.

There are two tiers. Tier 1 allows the company to raise up to $20 million, while Tier 2 allows the company to raise up to $50 million. Larger Tier 2 capital raises require audited financials.

Going public: Which exchange?
Foreign exchanges come in and out of favor depending on that countries’ specific capital market dynamics. For an extended period the German market was booming as economic unification powered the German economy. More recently, the London Alternative Investment Market (AIM) and the Australian market have gained acceptance as viable, if not first-tier, markets.

NYSE and Nasdaq. If one decides to go the traditional IPO route there are two major markets to consider, the NYSE and the Nasdaq. Over-the-counter (OTC) networks are for small companies that can't meet exchange listing requirements.

NYSE and Nasdaq vary in their requirements for initial listings. Specific requirements for each exchange and the alternatives offered are available on their respective websites. Among the deciding criteria are the following: pre-tax income, market cap, total assets, market value of public float, stockholders’ equity, minimum price and operating history.

Reality check
Have you considered all the personal and emotional ramifications of being part of a public company? Employees, customers and owners will be affected. You will be required to report results every quarter. No meaningful problem or dispute will escape disclosure. There is a reason there are fewer public companies today, and that private companies controlled by private equity and venture capital are staying private much longer.                          nFB

Allan Grafman is a director serving audit, compensation, nominating and governance committees. He has served on nine boards of public, private and PE-controlled companies. Previous roles include operating partner with a PE fund, CEO of a technology company and positions at ABC/Disney, Tribune and Archie Comics. He is CEO of AMV

Copyright 2018 by Family Business Magazine. This article may not be posted online or reproduced in any form, including photocopy, without permission from the publisher. For reprint information, contact bwenger@familybusinessmagazine.com.

Columbia Sportswear: An American success story

Columbia Sportswear Co. began in 1938 as a small hat maker. Today it’s a public company with almost $1.5 billion in revenue, known for its durable outdoor apparel and humorous ad campaigns. It’s on its third generation of family leaders, with participation by the fourth.

On the way to writing their own version of the American family business success story, the family owners of Columbia have overcome some tough obstacles.

Second-generation chairman Gert Boyle, now 87, lived in Germany as a child. When the Nazis rose to power, her parents, Paul and Marie Lamfrom, fled Germany and came to Portland, Ore. Her father, who had left behind a business that he’d owned in Germany, found a small hat company for sale. He bought it in 1938 and named it Columbia Hat Co.

Gert Boyle remembers working at the company during summers, putting labels on cartons and nailing crates together for shipping. “You did anything you were asked to do,” she says.

She moved to Tuscon in 1943 to attend the University of Arizona and graduated with a degree in sociology. There she met Neal Boyle, who worked selling vacuum cleaners while getting his degree. The couple married in 1948.

In 1949, Gert and Neal Boyle moved to Portland from Arizona with their young son Tim. Neal went to work for Gert’s father’s company. By the late 1950s the company had begun selling a few outerwear items such as skiwear in addition to hats. It became known as Columbia Sportswear in 1960. When Gert’s father died in 1964, Neal succeeded him as president.

“My first recollections as a kid were all about the business,” says Tim Boyle, 62, Columbia’s current president and CEO. “I’d visit my grandparents and my dad when they were at the office, which was in downtown Portland.” In junior high, he worked at the company, sweeping floors and doing other odd jobs.

Gert recalls being constantly in the loop about what was going on at Columbia while she was raising Tim and his two younger siblings. “When you have a family business, you hear it at breakfast, lunch and dinner,” Gert says. Even so, she was happy in her role as a mother.

Tim went to the University of Oregon in Eugene and planned to go to law school after graduation. “I always kind of thought in the back of my mind that I would like to work at the company,” he says, “but it was a very small company.”

But on Dec. 4, 1970, everything changed when Neal Boyle died suddenly of a heart attack.

Shortly before he died, Neal had taken out a $150,000 Small Business Administration loan, pledging his home and Gert’s mother’s home as collateral. The family’s survival was tied to the business’s survival. “We had to make it work,” Tim says. “We didn’t have a choice.”

Putting aside his plans for law school, Tim commuted to and from Eugene, where he was about to graduate from college, to help his mother run the business.

“We pretty quickly made every mistake in the world,” such as firing employees unnecessarily, he says. “Things were bad, and then they got worse.”

Looking for a way out, they tried unsuccessfully to sell the company. At one point, Gert recalls, she almost succeeded. But when it came time to sign the final papers, the would-be buyer had a list of additional demands. She realized she would walk away from the sale with only $1,400.

“I thought, ‘For $1,400, I’ll just run it into the ground myself,’” Gert says.

Instead of calling the loan, the bank suggested that the Boyles find an adviser to help them, which they did. It was the first step on a path toward stability and then growth.

One of their early realizations, Tim says, was that the company was making too many items too soon. “We needed to narrow the amount of items that we offered for sale and increase the geographic sales of those items,” he explains. With the goal of selling a large volume of a smaller group of products, Columbia branched out from its traditional sales area of Oregon, Washington, Northern California and Alaska and started selling products in other areas of the U.S.

It took almost a decade “before we had a positive net worth of any significance,” Tim says. And although it was not the life he had planned for himself, he did see increasing success. “And at the same time, all my buddies that had gone to law school were trying to get out of the business to do something else,” he notes. “I don’t know that anybody envisions what ends up happening.”

Growth and a public offering

The company stabilized and then began to grow, with new products driving the increased sales. In 1975, Columbia was the first company to introduce a Gore-Tex parka; it developed its own proprietary waterproof technology in 1991. In 1986, it offered its first Bugaboo parka for skiers. It introduced a line of footwear in 1993.

“We had very dramatic growth with a small collection,” Tim says. “Then we would add to the collection and grow more.” Today, Columbia sells about 5,000 styles.

The company’s decision to import products from Asia instead of making them at its own factories also contributed to its growth. Today Columbia’s products are made by contract manufacturers, primarily in Asia. As of the end of 2010, Columbia had a total of 3,626 employees, with about 2,200 in North America, 1,000 in Asia and 400 in Europe.

Columbia won customers over with what the company calls “the mother of all ad campaigns,” a series of ads that featured Gert and Tim Boyle and ran for more than 20 years starting in 1984.

“From the beginning, we realized that retailers in the United States don’t need another brand to sell, and at the end of the day, consumers don’t need another jacket or hat,” Tim says. “Our products are not like bread and butter; they’re not a requirement, and we have plenty of competition. There’s really no reason for anybody to buy our stuff unless we can make it demonstrably different.”

The ads capitalized on what made their products—and their company—unique. They emphasized features of the apparel, as well as the fact that a family stands behind the items.

In one TV spot, Gert drove a snowplow that covered Tim—clad in a Columbia winter jacket—with a giant pile of snow. In another, she piloted a helicopter that dropped Tim and his Columbia outerwear onto a snowy mountaintop. The tag line for both: “Tested Tough.” Print ads featuring Gert carried slogans such as “My mother makes combat boots” and “She snaps off necks and hacks off arms” (to check the insides of Columbia’s jackets).

The campaign was born when an advertising agency asked the Boyles what set Columbia apart from other companies. “It’s like a bad meal that you remember more than you do a good meal,” says Gert. “Our ads, I thought, were comical and a little corny. But they were funny. People would remember that company where the mother and the son do that funny stuff.”

As the market evolved, so did the company and its ads. The company realized that “the man who’s going to go skiing is probably going to go hunting, he’s probably going to go fishing,” Gert says. “People became aware of the fact that we not only made winter clothes but also summer fishing stuff.” This shift led to ads that focused more on the products’ benefits than on the personalities of the owners.

Over the years, younger customers have been gravitating to the company, Gert says. “It used to be that it was [an older] family that purchased Columbia stuff,” she notes. “Now younger people have a lot more money.”

In 1998, the family decided to take the company public. “We wanted to make sure that we had a broader ownership with the risk more spread [out] than it was just as a family business,” Tim says. They also wanted to be able to offer equity to employees so they, too, could benefit from the company’s growth.

The family retains control of the company even though it is public. As of the company’s most recent filings, Tim Boyle is the largest shareholder, with 43% of the shares. Gert Boyle is the second-largest shareholder, and family members including Tim Boyle’s sisters and children also have an ownership stake. Family members own more than 60% of the shares.

Even with family control, as a public company Columbia Sportswear must disclose more information than is required of a privately held business. Columbia’s revenues for fiscal year 2010 were $1.48 billion; the outlook for 2011 is about $1.7 billion.

One key reason why many family business owners prefer to keep their companies private is that doing so lets them keep the details of their business to themselves; it spares them the pressure of having investors evaluate their earnings each quarter. But Tim views the disclosure as good for business.

“Going public made us a better company,” Tim says. “Some private companies are very cloistered around information—when you’re working with the management team there’s always, ‘Well, we can’t tell them that.’ Being public made it very easy: We told everybody everything. It was highly transparent, and it really encouraged a lot of thorough thinking on the part of our management team. It allowed us to attract a very high-quality board of directors, which has also been really good for the company.”

Managing a public company, Tim says, means “I occasionally have to take off my hat as an employee and manager and put on my hat as an investor.” He’s unfazed about quarterly performance metrics: “While it’s challenging to be measured quarterly, I think it’s not a bad thing,” he says.

Columbia’s IPO paved the way for a series of acquisitions. The company acquired boot maker Sorel in 2000 and Mountain Hardware in 2004, the same year it reached $1 billion in sales. In 2006 the company acquired Montrail and Pacific Trail Products.

Innovating toward the future

Columbia continues to aim for innovation in its product development. For example, Omni-Heat is a thermal technology that helps a jacket’s wearer retain heat and stay warm in the coldest conditions. The technology, which took years to develop, required a long-term focus, Tim notes. Employees are also on the lookout for product improvements that can be made quickly. Innovation is “everyone’s responsibility,” Tim says.

Though Tim runs the day-the-day operations, Gert remains chairman of Columbia. She still signs the company’s expense checks. “If someone knows that you’re looking at the expense account, they’re maybe a little more careful,” she says.

The ad campaign, Columbia’s success and her 2005 memoir One Tough Mother have made Gert Boyle a public figure.

This visibility has not always been positive: In a November 2010 incident that made global headlines, Gert foiled a kidnapping attempt. A man posing as a deliveryman pointed a gun at her as she arrived at her home. When he ordered her inside her house, she told him she was going to turn off her security system. Instead, she pressed a silent alarm that called police. Three perpetrators eventually pled guilty in the case, which drew national headlines. They are currently serving prison sentences ranging from five to nine years.

The family declines to discuss the kidnapping attempt. However, in March 2011, Gert Boyle submitted a victim impact statement to the court. In it, she said, “No words now are adequate to reverse the memories of that night or give me my treasured and ordinary life back.… Before the attack, in countless ways, every day, I enjoyed the simple routines of life—going to the grocery store, having lunch with friends, enjoying my independence and the comfort of my home. Since that night, I have not returned to my home of nearly 24 years except to gather my belongings. I don’t feel safe living alone, and I no longer am able to enjoy the simple freedoms of everyday life.”

Outside of Columbia, Tim has branch-ed out into a new venture with his son and daughter: Gearhart Golf Links, the oldest golf course in Oregon, on the state’s northern coast. “It’s a fun golf course, and it’s great for the community,” Tim says. “It can be a lot better.” He plans to improve the quality of the course.

They have hired a management firm to run it, but he views the property as “something for my kids and myself to spend time on.”

Looking to the future, Tim is ensuring his children, Joe and Molly, understand the different roles family members can fill at Columbia.

“We’ve had a lengthy discussion with the kids about the various hats you wear: You have to be an investor and an employee,” Tim says. The children own some shares of the company and will likely get more. “We need to make sure they know the difference between being an employee and being an investor.”

Tim says he thinks it’s good for family members to work elsewhere for a time. His son, who is in his early 30s, now works at Columbia as a merchandising manager for the company’s equipment and accessories line and performance fishing and hunting gear, but he had an outside job before that. His daughter, who is in her mid-20s and is currently working outside Columbia, has worked for the family business in the past. One of Tim’s two sisters worked there for a time, as well.

“As a public company, anybody that works here that’s related has to be listed in the proxy,” Tim says. “We’re very transparent about reporting.”

What about succession? “My mom still comes to work every day, and she’s 87,” Tim says. “I’m planning to get at least that far along.”

Margaret Steen is a freelance writer based in Los Altos, Calif.

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Publicly owned and family-run

The Koss Corporation has been a public company for more than 40 years, yet many of its customers still think it’s a privately held family business. That’s an easy mistake to make; the business carries the family name and is family-run. As it happened, Koss Corporation—a leading designer and manufacturer of stereophones and related accessory products that’s headquartered in Milwaukee—became a public company more by chance than intention.

John Koss started the Koss Corporation as a hospital television rental business in 1953. But his real love was music; he was a trumpeter who had played with big bands and was always searching for new ways to improve the audio quality of the music he listened to at home. He and an audio engineer friend developed a phonograph with winged speakers that had a switch for listening to music through headphones. When they introduced it at a hi-fi exhibition, the headphones, intended to highlight the phonograph, captivated the audience.

Quick to recognize a business opportunity, Koss returned to his basement workroom to tinker with the headphones, making sure they provided full amplitude for high and low tones. After testing his invention on music buddies like Bobby Hackett, Dizzy Gillespie and Mel Tormé when they came through town, Koss launched his new product with the slogan, “Hearing is believing,” and secured an endorsement from singer Tony Bennett. The company’s ad, “Tony Bennett likes Koss stereophones, and you will, too,” caught the attention of music lovers. Koss’s business took off, igniting the personal-listening industry.

“We had to educate the public about stereophones,” says Koss, now 77 and chairman of the board, “because they associated them with headphones used for communication during World War II. Those devices had a thin sound and a lot of static, which is why we avoided using the word ‘headphones.’”

The growing demand for stereophones encouraged Koss to expand his business. In the 1960s, he bought several small companies, among them Rec-o-kut, a public company in New York that had fallen into bankruptcy. After running it as a separate entity for a year, Koss merged it with Koss Corporation in 1966. He kept Rec-o-kut’s listing on Nasdaq and changed its trading name to Koss.

“I would like to have been around then to discuss that decision with my dad,” says his oldest son Michael, 53, now Koss’s president and CEO. “For a company our size, being public is not worth the trouble, frustration, and exposure.”

John Koss sees it more as a mixed bag. “Michael’s right from the product standpoint,” John says, “but at the time going public helped us financially and imposed good corprorate discipline. And from a personal standpoint, it was very good for estate planning.”

Michael’s complaints don’t surprise Howard Neiman, a CPA and partner with Babush, Neiman, Kornman and Johnson, an Atlanta tax-consulting service for family businesses and closely held companies. “A lot of small companies regret the decision to go public, especially now with the added burdens and costs of complying with Sarbanes-Oxley,” says Neiman, who is a Family Firm Institute fellow. “Many are going private, and larger U.S. companies that want to go public are petitioning to do it overseas. ”

The Sarbanes-Oxley legislation, intended to curb the accounting shenanigans that got Enron into trouble, is especially galling to the Kosses, who pride themselves on being good stewards of their company. “We’ve always complied with government regulations,” says Michael, “so it’s annoying having to deal with this extra layer of bureaucracy. Small companies like ours are spending hours in auditing committees that would be better spent on strategic planning.”

For the Koss Corporation, a single-product company, there is another disadvantage to being public. Koss’s disclosure reports, unlike those issued by companies that manufacture multiple products, reveal more about the firm’s operations than the family would prefer. “Our competitors can easily get information about our product and figure out what they need to know,” says John Jr., 50, vice president of sales. “Information that they used to have to dig for is now readily available on the Internet.”

Public transparency goes beyond the company’s profit-and-loss sheet. The salaries and compensation packages of family members are also published annually for all to see and comment on. “If you’re not comfortable in the spotlight, this is not where you want to be,” says Michael. “You have to have a thick skin and be prepared to have your dirty laundry aired.”

The Kosses experienced firsthand the embarrassment of having their dirty laundry flutter in the wind back in 1984, when the company was forced into Chapter 11. Like many ambitious entrepreneurs, John Koss first tried expanding his product line in the mid-’60s by adding turntables, electronics and phones. When that didn’t work out, he returned to manufacturing stereophones. By the mid-’70s, he could no longer ignore the competition from the Japanese. He hired an outside manager who had worked for a larger corporation to guide the company forward.

Over the course of the next eight years, he hired and fired three presidents. All had encouraged him to expand the product line with lower-priced items like tape recorders and a portable radio, the Koss Music Box, and all underestimated the competition from Japan. The company’s sluggish Taiwanese supplier couldn’t keep pace with Koss’s Japanese competitors, and by the end of the year the company was teetering on the edge.

“I’m an innovator, an ideas guy,” says Koss. “A president is the operational guy. I brought in outsiders because the company was getting bigger, and I thought they could do a better job of growing the business than I could. It didn’t work out that way.”

Koss returned to the helm and refocused the company on what it did best, manufacturing stereophones. But by then, his creditors had lost confidence in Koss’s ability to withstand the onslaught from Asian competitors. In 1984, the company filed for reorganization. Michael, who had been living in London and building Koss’s European market, returned to Milwaukee, working first as manager of advertising and public relations and then as vice president of marketing. After the reorganization, Michael was promoted to vice president of Koss Corporation and put in charge of operations and finance.

Drawing on his company’s reputation for high-quality stereophones, John Koss worked ferociously to expand its dealer base. Against all odds, within one year he had lined up enough outlets to pay lenders two-thirds of the $14 million he owed. Since 1985, the company has turned a profit every year. In 2006, Koss had its best year ever, racking up sales of close to $51 million.

Michael says that his father, an artist and intuitive thinker, lost his footing when he tried to follow conventional business wisdom and practices. The company got back on track when his father was forced to think creatively. “When the Japanese manufacturers came out with $14.95 stereos, my father met the competition with $50 stereophones that set a new standard in the industry and put Koss on the map,” Michael says. “Now the high-end stereophones are the mainstay of our growing European market.”

The brief but painful stint in Chapter 11 taught the Kosses to run a tight ship. Michael, who became president and CEO in 1991, says he enjoys running the operational side of the business more than his father did. “We run many parts of the business as if we’re still in reorganization,” he says. “I keep a close eye on the monthly cash flow because it’s easy to get into a hole.” His father, too, likes the discipline of holding mandatory board meetings that’s imposed on public companies. “We’ve always had top people on our board,” says John Koss, “and we’ve benefited from their counsel.”

Not all founders are as accepting of the constraints placed on a public company as John Koss, says family business adviser Howard Neiman. “Founders who are used to running their companies or who like to make quick decisions,” Neiman says, “don’t want to report to a board or to shareholders. Going public can be a difficult adjustment for founders used to calling the shots.”

Having a publicly traded company may confer prestige, but Neiman says that family businesses can have most of the advantages of being public without the restrictions, costs and loss of privacy. “I advise family business to act as if they were public,” he says. Families can put structures such as formal or advisory boards in place and hold quarterly board meetings to keep family shareholders informed as well as ensure good financial reporting, compensation plans and rules of entry for working in the business. And as for the supposed advantages of raising capital on the open market, Neiman says, “It can be a lot cheaper for a family business to borrow money and pay a fixed rate than to take on all the additional costs of maintaining a public company.” John Koss raised $1 million in a secondary offer only once and never turned to the public for money again.

After more than 40 years as a public company, the Kosses are not about to go through the expense of becoming private. Koss is owned and controlled by the shareholders, most of whom are family members. The family owns about 60% of the stock—John Koss holds the lion’s share, and about 14% is held by employees through the employee stock ownership trust—so the Kosses have a big personal stake in the long-term health of the company.

By all accounts, the Kosses are a close-knit family. The whole clan rendezvoused recently in Florida to celebrate matriarch Nancy Koss’s 75th birthday. Michael and John Jr. say they are content in their respective niches in the company. Although the second generation is currently in charge, family members say they are not wedded to bringing the third generation on board when they come of age. Says John Koss of his 15 grandchildren, ages ten to 25, “If they’re competent and interested in working in the business, great, but it’s up to my sons, not me, who will succeed them.”

John Koss’s three daughters don’t work in the company, but they do own shares of stock. Koss set up a voting trust as part of his estate plan and, in this respect, he sees advantages to being a public company. “I give shares to my grandkids to use to pay their college tuition,” he says. “When they’re ready to sell, we don’t have to pay to evaluate the value of the shares because the stock market does that for us. The same goes for any shareholders who want to sell their shares. They offer them first to the voting trust, and if we can afford to buy them, we do.”

In families who don’t get along as well as the Kosses, says consultant Howard Neiman, disgruntled relatives may want to sell off their shares for as much as they can. This can threaten the viability of a family-controlled public company, he notes. “There is an inherent conflict between two classes of shareholders,” he says, “those active in the business who are well compensated and the non-active who may not be living as well. Most businesses prefer to pay out less in dividends and invest the profits in the company, whereas non-active shareholders want bigger dividends. Many public companies have been forced to sell to liquidate funds to pay off shareholders.”

The Kosses are fortunate to have been spared family infighting; they have enough on their hands staying ahead in an increasingly tough, competitive industry rife with violations of intellectual property rights, while also grappling with shorter product cycles and rising energy costs. Running a small public company that has thinly traded stock, Michael says he is cognizant of shareholders’ concerns, but his planning is not driven by quarterly earning reports. For the past 20 years, the company has followed a long-term strategy of making decisions in the best interest of the company, and that has worked out well for the shareholders and the family, the Kosses say.

“Every morning when my wife and I wake up,” says John Koss, “we are thankful for this business and what it’s provided for our family.”

Deanne Stone is a business writer based in Berkeley, Calif.

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The war against family control

Since 2005, Hassan Elmasry, an investment manager with Morgan Stanley, has been engaged in a hostile effort to weaken family control of The New York Times Company. He is angry that Times management has not responded to his suggestions for managing the business and increasing the stock price. And he is furious that the organization and ownership structure of the Times protects management from his efforts to force changes.

Elmasry, using the funds of investors whose money he manages, has bought a lot of Times Co. stock. He wants to have one vote for each share so he can influence the election of company directors. The chief executive reports to those directors and can be ordered by them to make changes to the company.

However, the Times, like many family-controlled firms, long ago structured itself so that the family could maintain control even after it opened ownership to others. In this case, two classes of common stock are involved. The A class, for most shareholders, has the one-vote-per-share value the opponent favors. Family members own 19% of these Class A shares. But holders of Class B shares have most of the votes; 88% of these shares are owned by the controlling family. What’s more, Class B voters have the right to elect nine directors, while Class A voters can elect only four directors. Six of the eight family members in the family trust must approve any change in this arrangement. Times CEO Arthur Sulzberger Jr., a great-grandson of founder Adolph Ochs, told the Wall Street Journal, “we are unanimous in our commitment to retain this.”

At the Times Co.’s 2006 annual meeting, nearly 30% of Class A shareholders withheld votes for directors. The company heard this message from several vocal shareholders led by Morgan Stanley’s man. Early in 2007, the company substantially increased its dividend. Several major assets, including a group of television stations, have been sold. So directors and the family listened and responded.

But as the 2007 annual meeting approached, the hostile campaign continued. When it was over, 42% of shares had been withheld in the election of directors. Several large shareholders withheld their votes for the second year in a row. However, Wall Street opinion is split, with strong management supporters in evidence also.

Control is always a primary issue in family firms. It’s a very noisy, public issue when other people’s money is involved. Recently the focus has been on family-controlled, publicly owned newspapers (the New York Times, Wall Street Journal, Chicago Tribune, Los Angeles Times and Washington Post), with investors complaining that two-class ownership is unfair.

The dual-class stock structure is a long-established approach that dates to the late 19th century and possibly earlier. One class concentrates control among a favored few while the second class represents ownership interest with much less power and no ability to control the company’s destiny.

The smaller group with power dominates the board, management, strategic planning and major decisions about the future. The (usually) larger group, with less powerful shares, is expected to be passive. It’s likely that a majority of the equity capital in family businesses is subject to these setups. (See Exhibit A for ownership options.)


EXHIBIT A: Capitalizing a company

When a firm is first organized, decisions are made on who should control the firm, how much equity capital it should have, how much debt is needed and available, and how much risk investors will accept in return for potential rewards. As time passes and circumstances change, adjustments are made to these early decisions.

People willing to assume the least risk lend a company debt. Most of the commercial bank debt a company owes is at lowest risk. It gets paid first after taxes and payrolls, which have higher priority by law.

A bit riskier is loans subordinated to other debt. That sets three ahead of them. Usually the tradeoff is that the company pays somewhat higher interest rates and fees and may accept restrictions on management. Guaranteed loans transfer repayment responsibility from the company borrowing funds to the guarantors. Preferred stock has priority over common.


Name Category Comment
Voting common
Stock shares
Equity This is the generic type that is most common. It is sometimes bundled in packages of several types of equity, debt, warrants or options.
Equity A favorite in family firms as a gift to family members or sale to others (employees, etc.). Does not dilute control but allows growth in value.
Voting common
Equity Each share is allotted a multiple of common votes. Example: A share may equal 10 or 20 regular common voting shares and/or have greater power to elect members of the board.
Preferred stock
Non-voting with
a fixed dividend
Equity Stock has no voting power but usually has a fixed dividend (perhaps 10%). If dividend is not paid, stock acquires voting power until arrears are paid.
Trust shares Equity
Arrangement to assist in estate planning.
ESOP Equity Employee Stock Ownership Program purchases some or all shares from controlling owners. Uses tax-friendly heavy debt. As debt retires stock ownership is vested with employees, with several ways to do it.
Guaranteed debt Debt Key owners accept personal liability.
Subordinated debt Debt Lender agrees another lender will be paid first. Often receives higher interest rate or concessions.


Among the arguments that the two-class structure best serves the company are that this arrangement fosters a firm commitment to the business, a long-term view, a better focus on serving customers and staff, and the freedom to take business risks that may lower profits briefly. Opponents counter that such managements are free from market discipline, focus too much on other stakeholders rather than investors, and become entrenched and flabby as competitors.

Many larger family-controlled firms have publicly traded shares overseen by the U.S. Securities & Exchange Commission. Shares are sold by brokers or included in mutual funds. These companies have long histories as successful businesses. Most family firms eventually evolve out of family control, but the number that have survived and continue operating under family control usually is quite a surprise to average citizens.

The key charge against the Times management is that the share price is too low because company executives are not creating the value that the money managers think management should. Some analysts believe a family-controlled firm’s shares always are lower than they might be because the folks in control have other interests not necessarily in concert with those of pure financial owners. They’re right, of course, but many, many things affect the value (share price) of every company. (See Exhibit B.)


EXHIBIT B: What is a share worth?

Factors in the value of a family business


Value consideration Comments
Public market value Broker will quote the most recent price.
Shares listed on a
major stock market
Between the time of that quote and execution of the order to sell, the price could rise or fall owing to demand for the shares.
Shares listed on a
lesser market
These shares will have a bid and ask price. The shares issued will be fewer and generally have more owned by long-term holders. Thus fewer shares are actively available and it is harder to find buyers and sellers. It’s called a “thin float” stock.
Privately held shares Comments
Book value Shareholder equity on the recent balance sheet divided by the number of shares.
Formula value multiples Nearly every kind of business has a known formula, or several, for rough valuation of a firm in that industry. Multiples of annual sales, cash flow and EBITDA (earnings before interest, taxes, depreciation and amortization) are common examples.
Ratios Sales to debt; current assets to debt; inventory turnover to sales; investment to number of employees. There are dozens of ratios used by veterans of various industries.
Appraised value An independent appraiser can be hired to study the company and provide an opinion on its value. That value often will be less than a strategic buyer may be willing to pay and more than a financial buyer finds attractive.

This may stir up dissatisfaction among minority shareowners who were told of a lower appraised value. Appraisals for estate planning usually are lower, with different assumptions and purposes.

to value
Control premium A block of shares that will deliver control of the company to a buyer is worth more than shares that will not. Buyers pay a premium for these.
Minority haircut Shares that won’t deliver control lose some value. But minority shares that would help others achieve a control block have a substantial premium.
Thin market (float) Family firms may have shares held in trusts by people who promised someone that they wouldn’t sell or be affected by family feuds. Of 100,000 shares, it may turn out that only 5,000 are for sale.
Strategic buyer Comments
Horizontal advantage Usually an organization in the same business or an allied field (horizontal growth). The buyer will foresee advantages to itself greater than the basic value of the business. The advantage may be access to products or customers, to patents or other intellectual property, to manufacturing capacity or to employees’ technical know-how.
Vertical advantage A strategic buyer may wish to move up the chain closer to its customers. The vertical expansion may involve acquiring its distributors or wholesalers to gain greater control andcost efficiencies.

The vertical move could also be down the chain to take over key suppliers. The gain, again, is in control of important suppliers or processes and in expanded cost efficiencies.

Financial buyer Comments
Operations tightener Some financial buyers are in the same business. Their specialty is efficient, lean operations. They look at a firm and see opportunities to expand earnings by new practices or procedures or through carefully planned investment the family didn’t do.

They give cash and earnings higher priority and usually demand, and get, tighter management. They often have spotted cost reduction and pricing opportunities. They also may have synergy options with similar firms they now own or control.

Asset strippers
(financial engineers)
These buyers plan to reshape the company, strengthen it and probably sell it. They will have searched carefully for hidden financial opportunities. There may be undervalued real estate that can be sold or developed. There may be non-core businesses or products to sell off.

On the balance sheet there may be good credit ratings with large unused borrowing capacity. They will be able to recapture much of their purchase price by increasing the debt. Such prospective large returns may make them willing to pay a much higher price, whereas the operations tightener will not.

Family situation Comments
Need to sell Some buyers search high and low for evidence of fear, anger, greed, revenge or hatred among family members. They may even promote it. All buyers will be alert to this. It is legitimate for them to want to understand the needs of the sellers. Holding this information inside is important. Competitive pressures on the company, unhappy demand trends for company products or services and near-term needs for large capital investment all are visible to outsiders.

Also very public are regulatory pressures or unhappy incidents like product recalls, labor troubles, fire or floods, and public misbehavior by managers.

All of these raise a question. Has the family had enough? Would a majority of the shares be for sale?

No need to sell If the firm is doing well there may not be any need or reason to sell. Even if there is not a family successor to run the company, the family can switch to an ownership-only role and have it operated by a cadre of professionals.

But a united family is essential for this. Those who own shares should want to own them. Those who want out (of jobs or ownership) should be out—and on good terms.

Crucial is my long-time message: Release the prisoners! Hostile takeovers are supported by shareholders who feel trapped, shut out or mistreated. That is very preventable.


Anti-family bias

The public arguments center on the issues of business strategy, value, financial details and control. Rarely mentioned in public circles is the envy, contempt or negative bias that many financial professionals have toward controlling families. The assumption is that family successors, especially in third and later generations, lack the competence, motivation, common sense and business judgment to run a company, especially a huge one.

Most of society’s biases have been addressed: Race, religion, gender, ethnic origin, disabilities, etc. are recognized as areas in which unfair negative bias existed and created damage and loss. It will be quite a while before much sympathy is mustered for executives who began with silver spoons and have had every advantage for their entire lives. Still, it is unfair to assume automatically that they’re not up to the job. My experience, after three decades in management succession, is that most rise to the occasion when given the top job. Those who can’t, or won’t, generally have gone into another career track either voluntarily or with assistance.

In the Times situation, the company is in an industry facing fierce competition, declining revenues, huge technology changes and a changing world in general. Most newspaper managements—public or private, family or not —feel under attack.

In the mid-1950s the Times was similarly embattled. Television was growing and suburban newspapers, many free “shoppers,” and other new competition for advertising were beginning to flourish. Circulation numbers were falling. In the quarter-century from 1930 to 1955, the number of New York City dailies dropped from 12 to six. (By 1980 only the Times, New York Daily News and New York Post survived.)

Organized labor was at its peak of power. The unions, truckers and others had a vise-like grip on daily operations. Typesetters had a contractual right to set every line of type. When national advertisers found it cheaper to provide their copy all ready to go on the press, the typesetters fought. The compromise first was that they would set the type but it would not be used. This was called “bogus” type: prepared, then destroyed.

The Times’ then-CEO, an earlier Ochs-Sulzberger family member, used the same tactic that U.S. military commander General Norman Schwarzkopf used in the 1991 Gulf War. He did not attack the front directly. He outflanked them.

Recognizing that the unions had the power to bleed him to death with strikes and sabotage, he made enough short-term concessions to keep things going and began a major business diversification. He knew that technological advances in the pipeline would weaken the union position. Also, long-time Times competitors—the Herald Tribune, World-Telegram and Daily Mirror—were in poor shape. They were not recouping their depreciation and would be too weak to finance modernization when it became necessary.

So the Times acquired radio and television properties outside New York, purchased and launched magazines and book lines, and grew much larger. A decade later the Times could survive a very long strike if necessary. The union caved gradually.

Later, with globalization a growing consideration, the Times and the Washington Post each bought a third of the International Herald Tribune when the New York paper folded.

Taking on the unions was good preparation for taking on the government. In the early 1970s, the Times was given a copy of the “Pentagon Papers” —an internal study of the Vietnam War that had been commissioned by the U.S. Department of Defense. The feds were furious and demanded that the study not be published.

Fierce pressure and threats were exerted, but the Times CEO went ahead with his commitment to “All the News That’s Fit to Print.” The Washington Post did, too. The folks who hold the view that family firm successors are flabby competitors ignore the fact that these are the things that were discussed at dinner when today’s family leaders were teenagers. At that time, Katharine Graham was the new, inexperienced CEO of the Washington Post Company. Make sure all the women in your family are encouraged to read her autobiography.

New business models

In recent years the rise of the Internet and global markets have forced publishers into new business models. The Wall Street Journal (Bancroft family) launched editions in Europe and Asia. The Washington Post (Graham family) and Los Angeles Times (Chandler family) began a joint venture pooling coverage and producing features for others. Then the Chandlers sold the Los Angeles Times properties to the Chicago Tribune. Many other families sold to Gannett or Knight-Ridder. Recently News Corp. chairman Rupert Murdoch, publisher of the New York Post, won control of the Wall Street Journal. He courted the controlling Bancroft family, offered a huge price premium and successfully divided the family and trustees of their shares.

Money managers, armed with the power to buy and sell for others, tend to speak forcefully of their conclusions and visions. Older heads on Wall Street also talk of the huge numbers of mistakes these folks make. The Chicago Tribune deal came apart a few years later. Knight-Ridder was wrecked by its acquisitions.

Does the fourth-generation leader of the Times have the stomach to see this through? Well, the Times now has complete ownership of the International Herald Tribune. The Washington Post had no plans to sell its share to its partner, but the deal was done a couple of years back. As they say in Washington: “on his watch.”

In the past, really dissatisfied investors were advised to sell their shares. And they did. More recently, Wall Streeters have worked to persuade managements. Many succeeded and the losers usually sold their shares. Self-appointed groups attempt to bully managers and use legislation, the courts, demonstrations and adverse publicity. Most of them fail.

Morgan Stanley’s man declared war. He and his allies won significant concessions but were blocked effectively from the victory they sought. The latest is a psychological approach by Business Week columnist Jon Fine (“Guarding the Gray Lady,” Aug. 6, 2007). Using an understanding and solicitous tone, he lays out options, predicts that the publisher can win, hints at Pyrrhic victory and recommends taking the firm private. His pitch is to publisher ego and legacy, with a carefully veiled allusion to sufficiency of testosterone levels.

A controlling family and the money managers are like the two-house legislature in U.S. government. The family, like the Senate, is around for a long time, takes a longer view and is protected by votes or tenure from sudden surges of temper, enthusiasm or fads. The investor representatives, like House members, reflect the immediate feelings, impulses and needs of their constituents. That balance was established thoughtfully and has worked well.

If a CEO, abetted by family control, pursues a strategy that is not sustainable, it will end. There can be strong arguments for a strategy, pro or con. But if it truly is unsustainable, it won’t continue. The CEO either will realize the error and change or will lose the necessary support. And if it turns out the CEO was right all along, serious error will have been prevented. I like that system.

James E. Barrett (jebcmc99@comcast.net) heads the family business practice of Cresheim Inc. in Philadelphia.

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Spring 2006 Contrarian's Notebook

The odd couple strikes it rich

The Boyles of Columbia Sportswear turn a family feud to their own advantage. 

You've probably seen—and maybe even laughed at— Columbia Sportswear's TV commercials. In one of them, Columbia's 81-year-old chairwoman, Gert Boyle, poses defiantly with clenched fist, revealing the words “Born to Nag” tattooed on her upper arm. In another, Gert pushes her CEO son Tim into a cement mixer to test the company's clothes for ruggedness. In yet another, Gert paralyzes Tim with a blow dart and abandons him to freeze on a glacier, but he survives the cold, thanks to his Columbia parka.

In the otherwise syrupy world of family business marketing, what a breath of fresh air this is. What a brilliant way to capitalize on a natural and universal phenomenon: the eternal strains between parents and their children. What a coup for a company whose sales have climbed from $800,000 when mother and son took charge in 1970 to $1 billion a year today.

At most companies, playing the “family business" marketing card means only one thing: painting the company as one big, happy family. Which is all well and good, except for three drawbacks: (1) It's boring, (2) nobody really believes it and (3) it can be very embarrassing when long-smoldering tensions suddenly explode in public.

The Pritzkers of Hyatt Hotels and Marmon Corp., for decades a living poster for family togetherness, were torn apart by such bitter internal bickering four years ago that they're now in the process of breaking up their empire altogether. News Corp. was shaken last July when the 34-year-old heir apparent, Lachlan Murdoch, decided he couldn't work any more for his demanding and demeaning father, chairman Rupert Murdoch. (His sister had already skipped out, apparently for similar reasons.) California's Mondavi wine dynasty and New York's Greenberg insurance family have suffered similar public humiliations in recent years.

Not Gert Boyle and her son Tim, who jointly own a 62% stake in Columbia valued at $1.07 billion (and who were featured in Family Business Magazine's January/February 1991 cover story, entitled “Starring in your own ads”). Mother and son have spent 35 years arguing about how to run the business since Gert's husband, Neal, died suddenly of a heart attack.

Their squabbling is no act: Taciturn Tim and outspoken Gert really do get on each other's nerves to such an extent that they've minimized their workday contact by locating their offices on opposite sides of Columbia's headquarters in Portland, Ore. Like the Jack Lemmon and Walter Matthau characters in The Odd Couple—or, come to think of it, like any two people who must spend a lot of time together day after day over years and decades—the Boyles complain constantly about each other yet ultimately cherish and respect each other. But unlike most other business families, the Boyles make no effort to hush up their quarrels. On the contrary, they celebrate them.

The Boyles seem to understand instinctively one of the great truths of marketing: To attract an audience, you need drama. And the essence of drama is conflict. Or as the business philosopher Arnold Glasow once put it: “Honesty is the best policy because it has so little competition.”

The enemy within: What Daddy doesn't know...

...can wreck his reputation, a superlawyer discovers.

You can't choose your parents (or your children), goes the old saw. And even if you choose not to invite them into your business, their actions can reflect on you.

Consider New York superlawyer David Boies, who has spent most of his 64 years cultivating a reputation as the legal world's “Mister Clean”— the man who advises scandal-tarred companies like Adelphia Communications or Tyco International to restore their reputations by making full disclosures of any conflicts of interest.

Now it turns out that Boies failed to discover or disclose a conflict of his own. As the Wall Street Journal reported last October, his children owned a one-third stake in Legal & Scientific Analysis Group, an expert-witness and research company to which Boies's law firm steered clients.

A “substantial portion” of LSAG's more than $2 million in revenues in 1999 and 2000 came from referrals from Boies's law firm, Boies, Schiller & Flexner. A holding company partly owned by four of Boies's six children received about $200,000 in profit and consulting fees from LSAG during those two years, the Journal reported.

Boies told the Journal that he was aware of some “but not all” of his children's ventures. He said he didn't know about their stake in LSAG until a reporter told him about it. He added that three of his children, who worked at Boies Schiller at the time, didn't know about their own stake in the company either. Boies said his eldest son, 45-year-old David Boies III, who has his own law firm, oversaw his siblings' investments during the years in question.

Meanwhile, in the past few years Boies's law firm has also guided clients to at least two other companies—a document-management firm and a copying firm—without disclosing the Boies family's stakes in those firms. These references generated millions of dollars in income and potential returns for Boies's children. Boies insists that attorneys at his law firm who personally recommended LSAG and the two other companies to clients didn't know about the Boies children's stakes in them.

This ignorance is certainly convenient. If David Boies, his three children who worked at his firm, and all the other lawyers at the law firm didn't know about their connection to LSAG, then technically they didn't violate any ethical rules by steering the law firm's clients to LSAG. But legal technicalities are beside the point here. If your primary business asset is a reputation for fair and transparent dealing, do you really want these strange coincidences and your lame excuses examined before 2 million readers of the Wall Street Journal?

This very question is now being pondered—at last—by the Boies family. David Boies told the Journal that his children are in the process of selling their stakes in all companies that do business with his law firm.

Good idea. “Good will, like a good name, is got by many actions and lost by one,” observed 19th-century Scottish editor Francis Jeffrey. Lord Francis might have added: It can also be lost by those who carry your name if you don't know what they're up to.

A tale of two gene pools, or: So you want to go public?

The Knight family thrives and declines by the public capital markets.

So you want to preserve your family company by taking it public? Before you do, check the quality of your gene pool and consider the following saga.

In 1895 an entrepreneur named William L. McLean acquired the Philadelphia Evening Bulletin, a struggling daily newspaper with a circulation of 6,000, smallest among Philadelphia's 13 daily newspapers. Thanks to his efforts, within ten years the Bulletin's circulation had increased to 200,000—largest in the city—and it remained Philadelphia's leading daily under two succeeding generations of McLeans.

Around the same time, in 1903, an Ohioan named Charles L. Knight bought the Akron Beacon-Journal. Upon his death in 1933 he passed that paper on to his sons John and James, and they subsequently built a respected chain of two dozen major dailies. When their Knight Newspapers (later Knight Ridder) acquired the Philadelphia Inquirer in 1970, the Inquirer was a despised second fiddle to the McLeans' formidable Bulletin. But astute observers of this competition noticed two points in the Inquirer's favor: First, Knight Newspapers, as a public company, enjoyed access to America's abundant public capital markets. Second, the McLean gene pool had largely run dry, and the third generation lacked the talent or imagination to compete effectively. Sure enough, by 1980 the McLeans had sold the Bulletin, and by 1982 the Bulletin had ceased to exist.

Now jump forward a generation. The Knight family is gone from Knight Ridder. Under cost-cutting pressure from Wall Street money managers, the Inquirer and other Knight Ridder papers have eviscerated their product by eliminating their most expensive (read: most talented) journalists. In its latest round of employee buyouts, the Inquirer virtually consumed its seed corn by retiring 75 journalists, or 15% of its staff. Yet this cost cutting failed to persuade Wall Street that Knight Ridder stock is a good buy. Consequently, the company's biggest institutional shareholders demanded that management sell the company altogether—and at this writing Knight Ridder's managers, ever beholden to Wall Street, were scrambling to find buyers.

In other words, the same public capital markets that once helped the Philadelphia Inquirer destroy the Bulletin now seem to be destroying the Inquirer. And the same thinning of gene pools that buried the Bulletin may be doing the same to the Inquirer.

What went wrong? Patriarch John Knight's eldest son was killed in World War II, and another son died in 1958. By 1969 John (known as “Jack”) was 75 and concerned about inheritance taxes and succession. Going public seemed the best solution. But Jack Knight neglected to set up a two-tier stock plan to preserve voting power for the founding family, as the Sulzbergers and Grahams have done so effectively at the New York Times and Washington Post, respectively. Instead he seems to have vaguely staked his hopes on his grandson, John S. Knight III, a Harvard and Oxford graduate with a passionate interest in continuing the family's control in order to avoid what he called faceless management by committee. But in the process of being groomed for the succession, John S. Knight III was murdered in his Philadelphia apartment in 1975 at the age of 30.

The moral? There's no magic formula for family business survival, because no one can control the future. And public capital markets, like everything else in this world, can be your friend or your foe, depending upon how and when you turn to them.

Marshall Field V, the Chicago department-store-heir-turned-newspaper-publisher-turned-real-estate-developer, once explained his guiding credo: “The only real tradition in my family is that each successive generation shouldn't blow it. If you can leave the family fortune a little bigger than you found it, well, that's what counts.” Which is probably as much as any generation can hope for.

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So you want to go public?

It was the worst of times. Last September, with war on the horizon and corporate earnings lackluster, the Standard & Poor's 500-stock index dropped 10% of its value, after having peaked on August 22. But not all stocks dropped. Shares of Medallion Financial Corporation, a lender to the taxi industry, rose from less than $3 in August to $4.80 by the end of September. Why? Who knows? As investors have learned too well recently, markets don't always behave rationally.

Welcome to the unpredictable world of public stock ownership. The Murstein family of New York, which controls Medallion, took the company public in 1996, and since then shareholders have faced a roller-coaster ride as the stock has climbed and crashed several times. Still, Andrew Murstein, Medallion's 37-year-old president, insists he has no regrets about selling stock in the business, which was started by his grandfather and reported $39.3 million in revenues in 2001. “Going public can be risky, but it has enabled us to grow much faster than we would have otherwise,” he says.

With markets so unsettled, initial stock offerings have faced cool receptions lately. But going public may be the right long-term goal for some family businesses. “Sometimes the public market is the cheapest source of equity capital,” says François de Visscher, a partner in de Visscher & Co., an investment banker for family companies in Greenwich, Conn. When markets are strong, investors will pay premium prices for public shares, especially if the capital is being used to fund a company with strong growth potential. Family businesses that have used public equity to finance healthy expansion in recent years include J.M. Smucker Co. and Comcast Corp., the cable television giant controlled by the Roberts family.

But going public can often prove disappointing. Public shares usually perform poorly when family members stage an initial offering simply as a vehicle for cashing out. New offerings also tend to sag when the family retains a big block of stock. “When there are only a limited number of shares trading publicly, then the stock might not attract much interest, and the valuation will be weak,” says de Visscher.

Under any circumstances, going public imposes costs and burdens. Suddenly a family must operate in the public eye, explaining actions to Wall Street analysts. The business must spend money to hire lawyers and accountants needed to make public filings. A company that once functioned for the benefit of the family must become concerned about cutting costs and rewarding shareholders. Some families simply can't make the transition to operating in the spotlight. And of course some get corrupted by their proximity to all that public money. The Rigas family, founders of Adelphia Communications, have been charged with using the company as their personal piggy bank. The Waksals, who ran ImClone Systems—and became famous for their friendship with Martha Stewart—have been accused of insider trading.

For the Mursteins, going public represented an opportunity to transform a small local business into a national operation. The company was founded by Leon Murstein, who immigrated from Poland to New York in 1937 and began driving a taxi. Leon soon was able to pay $10 for a medallion, the license required to operate a taxi in the city. Thriving in his new hometown, he began buying more medallions and taxis. Eventually Leon bought a garage that resembled the fictional operation portrayed on the 1970s hit TV show Taxi. In the business, drivers paid the owner a percentage of their fares as rent for the cars.

Alvin Murstein, Leon's son, joined the business at age 18 in 1952, becoming chief executive in 1974 when his father retired. Alvin, a soft-spoken entrepreneur who originally trained as an accountant, remains CEO today at age 68. Beginning in the 1970s, Alvin often brought his son Andrew to the garage, where the youngster tasted work at an early age.

Andrew says he learned much from his first encounters with drivers, most of them immigrants who spoke imperfect English and were desperate to make their way in America. The drivers typically worked 12-hour shifts and were required to turn in their cars at the end of the time. Some would finish late, having squeezed in one extra fare and earned a few more dollars. As one of his first jobs, Andrew collected money from the cabbies and listened to their excuses for tardiness.

“Some said they had to help a policeman catch a burglar or deliver a baby in their cab,” he recalls. “I eventually learned that most of the excuses were phony. But the real lesson was that these immigrants are extremely hard-working, and they're willing to work long hours to get ahead.”

The business grew steadily, and by the 1970s the Mursteins owned more than 150 taxis and medallions. Then some rough spots appeared in the road. As New York's economy stagnated, crime rose and cab driver muggings increased. About a quarter of the family's taxis sat empty because no one was willing to drive.

“We faced a severe manpower shortage,” recalls Alvin. “We weren't making any money operating cabs, so we needed to do something to salvage the investment.”

Faced with mounting debts, Alvin began selling medallions to drivers and was surprised to find eager customers. There was good reason for the demand: New York City had fewer than 12,000 taxi licenses circulating in the 1930s, and that number had barely increased over the years, even as demand for taxi rides climbed. Anyone seeking a medallion had to purchase one from an owner—and pay the market price. By 1970, the going price had risen to about $20,000. Few immigrant drivers could afford that sum, so most sales went to fleet operators or to drivers who could obtain financing.

Alvin figured those hard-working immigrant cabbies were a good risk, so he lent several drivers the money to purchase his medallions. Like the 19th century's great “merchant bankers”—the Rothschilds, Barings and Hambros in Europe and the Seligmans, Kuhns, Loebs and Goldmans in America, who began as merchants extending credit to their customers—Alvin Murstein soon discovered that financing drivers was more lucrative than employing them. The idea for Medallion Financial was born. In addition to selling his own licenses, Alvin provided financing for drivers making purchases from other people. In 1986, the company expanded to finance dry cleaners and other immigrant businesses.

Initially, the Mursteins relied on their own capital and bank loans. Then Alvin gradually found a network of some 100 private investors who were willing to finance his operations. These were accountants and lawyers who knew the Murstein family and believed the business was sound.

While his father expanded into financing, Andrew obtained an MBA at New York University and worked on Wall Street as an investment banker. There he gained an appreciation for the power of public equity. He was particularly impressed with deals known as roll-ups. In these, a company would raise cash through a stock offering; then it would purchase small, inefficient businesses and build them into a giant that benefited from economies of scale. A classic success of the type was Waste Management, which bought up family-owned garbage dumps and assembled them into a national powerhouse.

Andrew joined his father in 1990 and began thinking about how Medallion could grow. A big obstacle, he believed, was the steep cost of funds. In the 1990s, the company was borrowing money at the prime rate, then about 8%, and lending money to drivers at rates of about 10%. If Medallion could improve its credit rating, the company could lower its cost of borrowing to 6%, doubling the profit margin. Wearing a crisp white shirt and tie and talking confidently like the investment banker he once was, Andrew explains the strategy he developed. “I thought that if we became a large public company, we could have a very low cost of funds,” he says. “We could grow rapidly and take market share away from our competitors.”

Alvin approved Andrew's plans. He continued to hold veto power over investments, but encouraged his energetic son's bold ideas. The company went public in 1996, and for four years the strategy worked flawlessly. “When we first went public, everyone was excited,” says Andrew. “The employees watched the stock price every day. But now the novelty has worn off, and most employees have stopped following the stock price closely.”

With the shares soaring above $20, Medallion used the high-flying stock to acquire 15 companies, mostly finance companies that made loans to taxis and other small businesses. Some of these operations were located in New York, but other purchases were in Boston, Chicago and other cities around the country.

As Andrew had hoped, Medallion came to be seen as a diversified national company. Credit agencies raised its ratings, and Medallion's profit margins exploded. When Andrew promptly started another new business—offering advertising on taxis—Wall Street analysts applauded. “Analysts said this was a great business, and the advertising business showed tremendous promise,” recalls Andrew.

Then as the stock market began to dip in 2000, life became harder for Medallion. Banks, worried about rising defaults, tightened their credit standards and raised rates on small businesses. The terrorist attacks in September 2001 made institutions particularly nervous about loans to businesses in New York. Instead of paying two percentage points below the prime, Medallion began to be charged two points above. That extra cost destroyed Medallion's profit margins.

Suddenly Wall Street analysts began finding flaws in its business plan, saying that taxi advertising might be risky after all. One analyst, Robert P. Napoli of US Bancorp Piper Jaffray in Chicago, says that because of Medallion's weak earnings, its shares sell at a discount to the price of many small finance stocks.

But Andrew remained convinced that the difficulties were only temporary. At its core, he believed, the medallion business remained sound. Over the years, Andrew notes, the company has loaned $1 billion all told to the taxi industry and never sustained any losses. That's due to the peculiar nature of the market for medallions. With little increase in supply of the licenses, their price has steadily risen and now surpasses $200,000. Demand for medallions remains strong regardless of the national or local economy. In the past year, prices of New York medallions have climbed 15% as out-of-work immigrants have rushed to find a job that always pays. And if an illness or other problems sideline a driver, he can usually sell his license at a handsome profit, instead of defaulting.

On rare occasions, drivers do default on loans, but these cause only brief problems for Medallion Financial. “If someone defaults on a loan for a building, it can take the lender years to repossess the property,” says Andrew. “But if someone defaults on our loans, we send an independent company to pop the medallion off the car hood right away, and that taxi is out of business.”

But these nuances eluded most bankers. With banks unmoved by his appeal for lower interest rates, Andrew searched for cheaper financing sources. In September 2002, he announced the deal that boosted the company's stock price: a line of credit from Merrill Lynch that would help to lower some financing costs by three percentage points. The lower costs would immediately translate into higher profit margins.

While the Merrill Lynch deal goes a long way toward solving the financing problem, Andrew is looking toward a more comprehensive solution. He has applied for a charter as an industrial loan bank, an institution that can issue certificates of deposit and make loans to companies. That way, instead of depending on the whims of bank loan officers, Medallion's financing cost would be whatever rates investors demanded for certificates of deposit sold by Merrill Lynch or other brokers.

Today the Mursteins own about 16% of the company, a stake worth about $14 million at current prices. That's down from a peak value of $70 million. But Andrew insists he's not disappointed with the decision to go public. “I would rather own 1% of a terrific multimillion-dollar company than have 100% of a small company,” he says.

In the absence of other big shareholders, the Mursteins' 16% stake is sufficient to exercise control of the company. An acquirer could try to take the company away from them, but hostile takeovers—always rare to begin with—are extremely rare these days when financing is hard to find. Besides, it's unlikely that anyone would make a hostile bid for a business that owns few concrete assets and requires knowledge of an arcane market. To be sure, a friendly acquirer could offer to buy the company, but he'd have to pay a substantial premium. Executives of public companies are required to act for the benefit of all shareholders, and so they must consider acquisition offers. If the Mursteins did accept a friendly offer, they'd lose control of the company—but they'd probably come out extremely rich.

The Mursteins do add a note of caution for other family business owners who may consider going public. Dealing with regulators and Wall Street analysts can take considerable effort, they warn. Andrew says part of the reason the Mursteins could cope with the pressures of operating in a public arena was that the family expanded gradually, first taking on private investors. “We already had experience with outside investors,” he says, “so we were comfortable about making disclosures.”

“You can't spend your life focusing on the stock price,” says Alvin Murstein. “You've got to run the business the best way you know how. If the company succeeds, the stock price will go up, and things will work out.”

Stan Luxenberg is a financial writer who lives in New York.

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A tale of two families

When Pulitzer Prize-winning journalist Richard Aregood resigned as editorial page editor of the Philadelphia Daily News six years ago to take the same post at the Newark Star-Ledger, he left more than a job. He also left one of the nation's most respected newspaper companies, Knight-Ridder Inc., a publisher that blended a reputation for journalistic excellence nurtured by the Knight family with hard-nosed business acumen honed by the Ridder family. That 1974 merger of the Knights and Ridders had produced a publicly owned company whose 31 daily newspapers (including the Philadelphia Inquirer, Detroit Free Press, Miami Herald and San Jose Mercury News) often win awards for journalistic excellence.

In moving to Newark, Aregood joined Advance Publications, a private company tightly controlled by the Newhouse family ever since its inception in 1922. While the family's newspapers were quite profitable, their reputation for journalistic excellence was another matter. For years, the company's papers (including the Cleveland Plain Dealer, the New Orleans Times-Picayune and the Portland Oregonian) were viewed as mediocre news organizations, at best. Unlike Knight-Ridder, with its vast team of well-trained professional managers who recruited ambitious journalists, Newhouse was run by a small clutch of family members who at times seemed indifferent to the company's newspaper holdings. The family lavished more attention on the glitzier (if less profitable) magazines in the company's well-known Condé Nast division—like The New Yorker, Vanity Fair and Vogue. Still, Aregood says he has no regrets about his move to Newark.

“After 28 and a half years at the Daily News, I had been through too many changes, too many cutbacks, too many bright ideas from corporate headquarters,” he says of his disenchantment with Knight-Ridder. When he was approached about the job at the Star-Ledger, Aregood was receptive. “I didn't leave angry; I just got a better job,” he says.

The Newark job seemed better partly because, over the past decade or so, Knight-Ridder and Advance Publications seem to have moved in opposite directions. Publicly traded Knight-Ridder, while highly profitable, has struggled to meet the demands of the investment community and to compete with other public newspaper companies, which has resulted in cutbacks and battered morale at many of its papers.

“I don't think Knight-Ridder's star has gone out,” says John Morton, a nationally known newspaper consultant. “But it has dimmed a bit.”

At the same time, after years of ignoring the journalistic side of their business, the Newhouse family has awakened to the realization that high-quality newspapers make more money than mediocre ones. “It was probably a recognition that you can't get by publishing crappy newspapers,” Morton says. “Readers have too many other diversions.”

The result is a change in the trajectory of two large and successful family newspaper companies. Newhouse is on the rise, while Knight-Ridder is working to avoid falling farther from its once-lofty perch. The story of how this change occurred reveals how fundamental decisions made by families many years ago, as well as events over which they had no control, can dramatically alter the future of a family business.

To understand Knight-Ridder, one must look at the two families that created it. Charles Landon Knight purchased the Akron (Ohio) Beacon Journal in 1903. When he died 30 years later, he left the paper to his two sons, Jack and James, who started searching for growth opportunities. In 1937 they bought the Miami Herald, and then the Detroit Free Press three years later. Over the next 29 years they carefully acquired a handful of other newspapers, building a successful small chain of properties that were known for their journalistic quality and for the company's willingness to allow editors to pursue their vision.

One telling example of the company's farsighted commitment to public service occurred during World War II, when newsprint shortages plagued the industry. To provide adequate space for news, the Miami Herald's longtime editor Lee Hills decided to stop printing advertisements, and the Knight brothers went along with his plan. Public approval, and circulation, soared. And the competing Miami News never recovered the circulation it lost to the Herald during that time. The News eventually went out of business, leaving the Herald with a monopoly in the lucrative Miami market.

But by 1969 Jack Knight was 75 and concerned about the effects of inheritance taxes on his family as well as who would succeed him. (Jack Knight's eldest son was killed during the final two weeks of World War II, and another son died of illness in 1958.) Going public seemed the best solution. However subliminally, that decision introduced a new corporate priority—impressing Wall Street—which in turn led to Knight Newspapers' 1974 merger with Ridder Publications Inc.

If the Knight family was known for publishing high-quality newspapers, the Ridder family was known for publishing profitable ones. Herman Ridder started the family business in 1892 by purchasing the Staats-Zeitung, America's largest German-language newspaper. By 1926, he began expanding the business, purchasing the Journal of Commerce. Over the next few years he bought newspapers in Minnesota, North Dakota and South Dakota. Duluth and Grand Forks weren't necessarily major media markets, but Ridder's papers there generated steady profits. In 1952, Ridder Newspapers (having passed to the founder's three sons) moved to California, buying a newspaper in Long Beach as well as the San Jose Mercury and News. The company eventually merged the San Jose properties into one newspaper, and family members watched with delight as Silicon Valley became one of the hottest growth areas in the country.

In 1969, the founder's grandson Bernard H. Ridder became president and CEO, and the company went public. That same year, Bernard's son, P. Anthony Ridder, became business manager of the Mercury-News. Tony Ridder, who earned a degree in economics from the University of Michigan in 1962, had already spent several years learning the newspaper business in cities ranging from Aberdeen, S.D., and Duluth to St. Paul, Minn., and Detroit. By 1977, he would be publisher of the Mercury-News.

For several years after the 1974 merger of the two family businesses, things went about as well as could be expected. The Knight family influence improved the editorial quality of the former Ridder newspapers, and the Ridder family's business skills brought greater organization and profits to a Knight chain that had often run by the seat of its pants. But both families suffered from a dearth of possible successors. Jack Knight had seen two sons die, and his only grandson was murdered in a robbery attempt in his Philadelphia apartment in 1975, while he was working as a copy editor at the Daily News there. Tony Ridder was the only Ridder in his generation being groomed to take over the business.

Jack Knight died in 1981 at the age of 86, but the company continued to thrive. By 1985, Forbes magazine reported that Knight-Ridder had seen ten years of rising profits and was “awash in cash.” With Tony Ridder presiding over the fantastic growth of the San Jose Mercury-News but not yet ready to assume control of the company, Knight-Ridder turned to James Batten, a respected former editor at Jack Knight's Charlotte Observer and a protégé of the revered Lee Hills in Miami.

When Batten became CEO in 1988, he eased the concerns of many Knight-Ridder editors who feared the Ridder family's bottom-line orientation would subsume the Knight family's high ideals. As one former Knight-Ridder executive told the Washington Journalism Review in 1996, “Batten gave the editors some confidence that their interests wouldn't be sold out to the bean counters. His presence is that important.”

But Batten's ascension to the top job coincided with Wall Street's growing disenchantment with Knight-Ridder. In 1988, Forbes criticized Knight-Ridder for not following the example of Gannett Co. and Tribune Co. and diversifying its holdings more aggressively. By 1991, the newspaper industry was in deep recession, and Knight-Ridder's profit margins had shrunk from 15% in 1987 to 10.8%, at a time when other large newspaper chains, such as Gannett, boasted profit margins closer to 20%. Securities analysts started carping, and the price of Knight-Ridder stock fell. Batten tried to use his personal charm to mollify critics by emphasizing the need to maintain high-quality journalism. But it was soon clear that cutbacks would have to be made.

Newsroom employees didn't take the belt-tightening message well. In Philadelphia, famed editor Eugene Roberts, who had transformed the Inquirer into one of the nation's finest newspapers, left abruptly in 1990 after 18 years and 17 Pulitzer Prizes. Morale among reporters and editors plummeted at that paper, as well as in Miami and Detroit (where a prolonged strike wore on). At the same time, Tony Ridder began taking a more active role in the running of the whole company. He became the lightening rod for the bitterness of many employees, who dubbed him “Darth Ridder.”

Then, in 1995, Frank Batten suddenly stepped down after being diagnosed with cancer at age 58. Tony Ridder took over as CEO, probably at least a few years sooner than anyone had planned. And Knight-Ridder started evolving into a company much more firmly identified with the Ridder family's legacy. Tony Ridder continued trimming the company's newspapers to eke out more profit and satisfy stockholders. And last year, in a move solidifying the symbolism of the Ridder family's control over the company, he moved the corporate headquarters from Miami to San Jose. Revenues at Knight-Ridder remain strong ($3.2 billion in 1999), but net income dropped a bit to $340 million in 1999 from $366 million in 1998.

Most of the Knight-Ridder saga has played out quite publicly over the years. As a public company, it reports on all its major decisions and operations. And it has a staff of people employed to assist with shaping its corporate image. The company's website (www.kri.com) tells the business's history in great detail. A visitor could spend hours there learning about its various holdings.

Over at Advance Publications, it's a very different story. The Newhouse family maintains tight control and has always been unwilling to reveal much about their operations. Brothers Samuel I. (Si) Newhouse Jr., 72, and Donald Newhouse, 70, run the company, Si as chairman and Donald as president.

The Newhouse culture is a direct reflection of its tight-fisted founder, Samuel I. (Sam) Newhouse (1895-1979), who watched his Russian immigrant father fail in his first business venture. At the tender age of 13, Sam had to become the man of the house when his father's health forced him to leave home for long stretches of time. Sam Newhouse began working for an attorney in Bayonne, N.J., who eventually asked Sam to go to work at a failing daily newspaper the lawyer owned. By age 16, Sam Newhouse had turned around the fortunes of the Bayonne Times and was sharing in its profits and adding relatives to its payroll—a tradition that would continue.

In 1922, still in his 20s, Sam Newhouse bought his first newspaper, the Staten Island Advance. By the time he died in 1979, his media empire included 31 newspapers, seven magazines, six television stations, five radio stations and several cable TV franchises. But the company's organizational chart existed only in the head of Sam Newhouse, who rarely worked at a desk and was known for moving from place to place with an old brown briefcase bulging with papers. He had no corporate staff to speak of, and no executive committees to make important decisions.

To keep his company in the family, Sam Newhouse issued non-voting common and preferred shares in Advance Publications to his wife, his two sons and two brothers. The voting shares—just ten of them—he kept for himself. When he died in 1979 and passed these voting shares on to his sons, the family filed estate tax papers with the IRS contending that these ten voting shares were worth just $182 million, and that the estate tax bill was just under $49 million.

The IRS took strong exception. By its calculations, Sam Newhouse's estate was worth $1.2 billion and the Newhouse family owed $609 million in estate taxes. The IRS even sought to collect a 50% civil fraud penalty, claiming the family was trying to dodge its tax responsibilities. With the penalty and interest, the IRS eventually sought more than $1 billion from the family.

The Newhouse family decided to fight. They had little choice: The alternative was to dismantle the company to pay the tax bill the IRS presented them. The case dragged on for ten years, but in the end the Newhouses emerged victorious. In 1990, a judge found in the family's favor, and the Newhouses paid the government just $48 million in estate taxes. To some observers the case was one of the biggest crimes against the IRS in history. But the unseen side benefit was the vast improvement since then, under family control, in the quality of the Newhouse newspapers.

Sam Newhouse's unstructured culture survives at Advance Publications even today, when the company has estimated annual sales of $4.2 billion and is ranked 36th on Forbes' list of America's largest private companies. According to Newhouse lore, a few years ago someone mentioned to Donald that perhaps it was time to hire a corporate staff to help run things. “If I had a corporate staff,” Donald Newhouse is said to have answered, “they would want to do something.”

Needless to say, there is no corporate staff at Advance. But there are plenty of Newhouses. Over the years, several dozen family members have worked in the business, and members of the next generation await their turn at the helm.

This approach made money for the Newhouses but rarely produced great journalism. The family took a hands-off approach to editorial matters, leaving individual editors with a great deal of autonomy. “The condition of their newspapers was a reflection of the management style when Sam was alive,” says consultant John Morton. “The person who was in charge [at an individual paper] basically ran the place. It could be good or it could be horrible.” And since making money was always the paramount goal, newsroom managers tended to avoid expending any unnecessary funds on projects with journalistic merit that had no direct commercial payback.

In 1990, for example, Newhouse's highly profitable Springfield (Mass.) Union-News was embarrassed by public allegations that its reporters knew about the local district attorney's ties to organized crime but weren't allowed to write about them. Other charges soon spilled out about similar cases over the years in which the Union-News had protected public figures or avoided controversy. Newhouse's big papers in Cleveland, New Orleans and even Newark (Si's operating base) were similarly viewed among journalists as some of the least desirable places to work in the country.

Si and Donald seemed to get the message. “All of a sudden the family decided they wanted to have better newspapers,” says Richard Aregood. “They went out of their way to hire editors who knew what they were doing” and give them more resources. When Aregood came to the Newark Star-Ledger in 1995, he and other news executives proposed adding a new “Perspective” section to the Sunday edition—a kind of week-in-review section, devoid of advertising (and, consequently, of revenues). That's the kind of idea that never would have gotten off the ground at a Newhouse paper more than ten years ago. But Si Newhouse “said it was an improvement to the paper” and gave the green light, Aregood recalls.

Since 1990, the company has brought in new editors to run the Star-Ledger, Cleveland Plain Dealer, Portland Oregonian and New Orleans Times-Picayune, as well as to oversee the Newhouse News Service (whose bureau chief, Deborah Howell, also left Knight-Ridder). In January 2000, a glowing story in the Columbia Journalism Review concluded that the Newhouse papers now offered “something rare for editors now that most newspapers answer to Wall Street: freedom to shape a paper without measuring everything against the bottom line.”

Suddenly, it seems, Newhouse newspapers are desirable places to work. At the same time, Knight-Ridder papers are often places where journalists feel stuck.

What has caused the difference? The decision by both the Knight and Ridder families to go public in 1969—in contrast to the Newhouses' decision to fight to stay private—is the biggest factor. The thinning of the Knight and Ridder gene pools, compared to the fecundity of the Newhouses, may be another. While going public eased inheritance burdens for both the Knight and Ridder families, just three decades later the Knight family has virtually no involvement or interest in the business. And except for Tony Ridder, who reportedly controls about 5% of Knight-Ridder stock, no other member of his family holds a significant stake in the company or a high-level job.

As a result, Knight-Ridder has endured years of complaints from stockholders and analysts that the company's bloated newspapers keep them from earning a 20% profit, which analysts see as the holy grail for such publishers. “It's still possible to publish a good metropolitan newspaper and make a 20% profit,” says Morton. “The New York Times does it, the Washington Post does it.” And thanks to years of staff reductions, Knight-Ridder's Philadelphia Inquirer is approaching that goal as well. But it's come at a cost. “In the long run you have to pay attention to Wall Street,” Morton says.

The Newhouse family, by contrast, doesn't have to listen to Wall Street. Sam Newhouse gambled, but the old man won. With his ploy of issuing preferred stock to his family and keeping only a few voting shares, he managed to insulate his heirs from a big estate tax bill. He didn't worry much about journalism, but he did worry about estate taxes—and American journalism is better off as a result. The Knight and Ridder families did not undertake such strategies and were forced to go public—probably to the detriment of their readers.

To be sure, had the IRS won its case against Newhouse (and many feel the government mishandled the case), things would be quite different today. But the real test for both companies will come when the economy slows down again. Another recession in the newspaper business will test both Newhouse and Knight-Ridder, says John Morton, who was a government witness in the Newhouse estate tax trial.

“In the early 1990s, all of the publicly traded newspaper companies made big cutbacks and hurt themselves,” Morton says. “They were eating their seed corn.” Privately owned companies can be more insulated from the economy's dips, if their owners are willing to accept smaller profits.

“If there's another recession, you'll see more cutbacks at Knight-Ridder,” Morton notes. Whether the same thing happens at the Newhouse family's newspapers remains to be seen, of course. As their saga reminds us, in business, unlike literature, there's no such thing as a final chapter.


Stephen J. Simurda contributes regularly to Family Business and Columbia Journalism Review from Williamsburg, Mass. (ssimurda@ journ.umass.edu).


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Going Public in a Rollup

In 1996, Troy L. Fraser was running the company his father started in their backyard while Troy was still a teenager, and he was running it well. Fraser Industries Inc. of Big Spring, Texas, posted $50 million in revenues that year. The company, which makes and recycles pallets—the wooden platforms used to ship heavy machinery and supplies—was a market leader in the Southwestern United States. It was at the end of a three-year growth spurt during which it had opened nine new plants.

Growing much larger wouldn’t be easy, however, because the pallet industry is highly fragmented and controlled by regional companies generally smaller than Fraser. To achieve significant new growth, the company would have to break out of its region—a move that could cost a lot of money before ever returning a dime. And Fraser was much too small to consider a serious public stock offering to raise capital.

Since March of this year, all that has changed. Troy Fraser is now part of the senior management team at PalEx Inc., a publicly owned pallet maker with annual revenues of more than $100 million that operates in nine states, blanketing the southern half of the country from Virginia to California.

Troy Fraser, and his family company, were part of a rollup IPO, a method of taking small companies public that is gaining in popularity because it involves little upfront cost for owners and can yield considerable rewards. The idea is to “roll up” a number of small companies in a similar line of business and turn them into one medium-sized, or even large, public company.

“It’s called a ‘poof’ transaction because one day these are all separate privately owned companies, and then the next day they are all one public company. Poof! Just like that,” says Howard Ross, a managing partner for Arthur Andersen in Philadelphia, which has put together several rollups. Ross is one of the pied pipers of the rollup IPO movement, which he says started about three years ago.

While a rollup can be an ideal path for some family companies, particularly those already considering an eventual sale, they have their downside. Owners will no longer have full control of how their companies run. They may have significant management responsibility, but they will inevitably have to answer to someone else, probably an outsider whom they have known only a short time, or a board.

Being a public company, moreover, means opening the books to a degree that may be discomfiting for some. And a rollup inevitably produces a company with a different culture and set of standards than any of the individual companies that make it up. If you’re not prepared to adapt to these changes, then it might be best to avoid the idea.

Nevertheless, there are tremendous benefits for owners who wish to get some of their equity out of their business and have a role in steering the fortunes of a larger, stronger enterprise. By selling some of the ownership in his pallet company, Troy Fraser pocketed just under $1 million and received another 1.4 million shares of PalEx stock (which opened at $7.50 but was soon selling for more than $10). Best of all, he never had to leave his family business. “What had been Fraser Industries is now the western region of PalEx,” says Fraser, who is now chief development officer for PalEx. His brother Steve is operations director for the western region.


What is a rollup?


“A rollup is the rapid aggregation of businesses in an industry sector to achieve immediate critical mass,” Ross explains. But really understanding what a rollup is requires a look at a couple of them.

Let’s return to PalEx first. Fraser Industries’ revenues were roughly equal to those of Ridge Pallets Inc. of Bartow, Florida, a company that covered the Southeastern states. “We knew the management at Ridge real well through our industry organization [the National Wooden Pallet and Container Association, or NWPCA], where we had served on the board of directors,” says Fraser, 47, who is also a state senator in Texas. “We were considered the two industry leaders,” and teaming up made a lot of sense, Fraser adds.

A third company was also rolled up to make what is now PalEx. With just $4.3 million in 1996 revenues, Interstate Pallet Co. of Richmond, Virginia, was much smaller than its two partners. Interstate’s founding president, Stephen Sykes, was also a former president of the NWPCA and is considered the industry expert on waste disposal. Fraser explains, “Waste is a major part of our expenses. As much as 10 percent of the product we’re working with becomes waste. And Steve Sykes has been real good at turning that waste into a profit center.” That skill was something the managers at Fraser and Ridge realized they wanted.

So together, Fraser, Ridge, and Interstate became one company, completing a public offering that raised $24 million in mid-March. The companies were different, but they worked with the same product and complemented one another well. The hope is that they have turned three good companies into one even better company.

While the former executives at Ridge and Fraser are on the senior team at PalEx, the company is run by an outsider, Vance K. Maultsby Jr., a former partner with Ernst & Young in Dallas. But a family business culture has survived it all; both Fraser and Sykes have brought their children into the business.


Who are the promoters?


While consolidators and aggregators have been buying companies and taking them public for their own profit for years, a rollup IPO is more of a partnering arrangement brokered by a promoter. The owners of the companies agree on the financial details and receive significant shares in the new firm as well as cash from the offering.

The promoter is typically one of two types of people. He can be a financial professional who recognizes an opportunity in an industry and gets financing to try to put together a deal. The promoter may or may not want to run the eventual public company, but if he doesn’t, then an outside management team is likely to be brought in. Another type of promoter is the owner of a company in the industry being considered for a rollup. This person knows the business and the players well, and wants to consolidate with other companies to create a larger entity. He probably wants to run it, but may bring in outside managers. In both cases, managers from the rollup up companies will usually be welcome to stay, but their role and level of influence will depend on how much they can demonstrate their worth to their partners, and how flexible they are when the deal is implemented.

The payoff, if the merger reaches the stage of a public offering, can be bountiful. Sam W. Humphreys, head of Main Street Capital Partners, a merchant banking firm, brought the PalEx companies together and took them public. Main Street committed up to $1.2 million to pay the expenses of the transaction, and in return, received 10 percent of the shares of the public offering. The firm’s stock is now worth a total of about $10 million at the current market price, and Humphreys is now the non-executive chairman of the company.


Telemarketing rollup


TeleSpectrum Worldwide Inc., a rollup of six telemarketing and telephone fulfillment companies that went public on Aug. 8, 1996, was an even more complex package. The deal was spearheaded by CRW Financial, whose chairman and CEO is J. Brian O’Neill. O’Neill recruited nine other investors who together put up $2.1 million to cover the upfront costs of the IPO. Between them, they ended up dividing 1.4 million shares in the new company.

The TeleSpectrum rollup involved a broad range of different-sized companies along the East Coast, ranging from one with 1995 revenues of $31.9 million, to four companies like NBG Services Inc. with revenues around $12 million, to another with annual sales under $7 million. Four were primarily telemarketers that were not family operated. The other two—a firm providing direct-mail and fulfillment services and another that does market research—were run by families.

The experience of Bill Rhatigan, chief executive of NBG in Cambridge, Massachusetts, demonstrates how a small company is suddenly transformed by a rollup. In 1995, NBG racked up revenues of $12.8 million from its telemarketing centers in Massachusetts and Arizona. In 1996, those revenues shot up to $22 million, but by the end of that year Rhatigan was no longer a CEO. Instead he was president of operations for TeleSpectrum, which has facilities across the country and revenues of roughly $120 million.

The companies in the TeleSpectrum group needed a strong sense of cohesion before going public. “I was responsible for the integration of all the telemarketing companies, which were four of the six companies originally involved,” Rhatigan says. It was a new challenge for Rhatigan, and one he enjoyed. “When we went into the financial markets, it became clear that we would be better off if we were more fully integrated,” he says. This included commitments that management would stay on, at least through the transition stages. “Anyone who wanted to stay on had the opportunity to do so, in significant roles,” he says. But, he adds, only two of the six former chief executives actually have stayed.

The top management team at TeleSpectrum includes three executives who had not worked for any of the companies in the rollup, including one of the investors, Michael Boyd, co-founder of QVC, the television shopping network. Bringing in outside management is common in large rollups, and, obviously, can dilute the influence of the former majority owners. But when the TeleSpectrum rollup was completed, Rhatigan says he and the other owners of NBG received $30 million for the company, half in cash and half in TeleSpectrum stock. “We knew we wanted to sell someday,” Rhatigan says, “but we didn’t envision getting out by going public.”

Perhaps the biggest advantage of a rollup is that it allows small companies to become much larger very quickly, taking advantage of several benefits.

“It addresses some very specific issues about how you create an attractive company,” says Seth J. Lehr, managing director of Legg Mason Wood Walker, a regional investment banking firm in Philadelphia that has been active in rollups. Chief among these is giving a company the chance to raise money needed for growth.

Troy Fraser saw several benefits for his business. Some were not necessarily anticipated, such as the help that the stable management team from Ridge provided to Fraser. “Because of our explosive growth we had a lot of young managers in place,” Fraser says. “The folks at Ridge were real helpful in training those people.”

But the biggest benefits for Fraser came after the cash was divvied up—the economies of scale that increased the companies’ efficiency and market impact. PalEx was able to save money on insurance by self-insuring for some needs and getting better rates for others based on its larger size. Common purchasing has also saved money. “It’s possible to save 3 to 5 percent with these economies of scale,” Fraser says. And then there is the fact that, for the first time, Fraser works for a company that can call on national accounts, since it has facilities near most markets in the country.

In exchange, a rollup partner such as Fraser does have to cede some control and give up any plans to continue ownership of the business in the family. Nevertheless, a rollup IPO almost always allows a family business owner to continue running the company, as a division of the larger firm, and to participate in management of the new company.


The upfront risk


Rollup IPOs are a fairly new phenomenon, and no one has yet compiled numbers on how many have been attempted. At a recent conference on rollups, nine deals were listed. The first one took place in September 1994 when Corporate Express Inc. was created by six suppliers of office products. The combined revenues totaled $637 million at the offering, and Corporate Express now has revenues of nearly $2 billion.

The chances are that numerous other such deals never reached the offering stage. In fact, few that start forming will ever go public. “I’m working now on 12 different deals,” says Howard Ross of Arthur Andersen. “I would predict two or three will actually go public.” In the other cases, the promoter will not be able to bring together the right combination of companies, or the financial community will be pessimistic when promoters try to sell the deal, and the offering will be shelved.

As Lehr of Legg Mason explains, a rolled-up public company “needs to exist for a reason. There needs to be a positive story behind it. If you can demonstrate that what you’re providing your customers is a total solution that is not out there now, then I think you have the right idea.” If not, the rollup may not roll.

One advantage to the businesses in a rollup IPO is that they do not bear any of the initial financial risks; the promoter pays all the upfront costs of putting the deal together. These costs can be steep, totaling $2 million in the TeleSpectrum case. In some instances, as many of five years of audits may be required before a merger gets to the offering stage. Unless the business owners themselves take on the role of promoter, however, they simply agree to participate upon completion of the public offering. They sign a letter of intent and the deal becomes final only on the day the combined company goes public.

If the rolled-up company succeeds in going public, the fees all come out of the proceeds, which means the business owner can figure almost exactly how much he or she will ultimately receive. The fees, by the way, go mostly to lawyers and accountants, and the total of these upfront costs will vary with the number of transactions—for example, the number of audits—required. A professional should be able to estimate the total in advance of the offering.

A seller considering participation in a rollup should treat the deal with as much care and wariness as any other exchange of ownership. And remember that not all rollups are equal. “The fact that a rollup is good for the promoter doesn’t mean it’s good for a family company,” says Ross.

Bill Rhatigan says that his company reviewed and rejected participation in another rollup before saying yes to TeleSpectrum because they didn’t like the way the first deal was being put together. “You have to spend a lot of time understanding not only what the initial process will be, but how it’s all supposed to unfold later,” he says.

Since business sellers who participate in a rollup typically get a lot of stock in the new company, the real measure of the rollup is how well that stock performs in the years after the deal. If one of the companies rolled up starts to lose money, its performance affects everyone, and ultimately the stock price.

Furthermore, many rollups rely on new acquisitions to continue revenue growth. A seller must feel comfortable that the cash will be available for these acquisitions, or that any debt burden the company might take on is not unwieldy.

“But probably the largest factor is that you want to make sure you’re going into business with someone you’re compatible with,” advises Fraser. Howard Ross agrees. “It’s often difficult to integrate the various businesses, and getting them working toward a common goal is tough.” Ross adds that just getting used to being a public company can be hard. “A lot of people do end up leaving because of the huge culture shock.”


Stephen J. Simurda is a business writer in Northampton, Massachusetts, and a frequent contributor to Family Business.


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