September 6, 2006

Management Makes a Go at the Un-IPO

Carlton J. Dingleflopper IV remembers the days when his upstart little venture was beating the bushes for customers, revenue and capital. Ah, the salad days. Before the big, proud moment when Dingleflopper Industries executed its IPO – bringing cash into the coffers, attention from analysts and scrutiny from the SEC.

The day the company went big time. Curse that day, thinks Dingleflopper. That’s when all these people started hanging around here acting like they own the place. (Oh, right, because they do.) That’s when Carlton found himself with a Board. Oh, he had a board before, but he actually has to listen to this one. In fact, this one could fire him. Or it could make him fire members of his management team. Remember when he was going to make his brother-in-law Vice President for Organic Ventures and Development Initiatives? Forget that.

All this, and the stock is tanking.

Screw it, decides Dingleflopper. I’m buying back my own company. And he can. And there are lots of other Dinglefloppers doing the same thing.

Management-led buyouts in the U.S. are happening in 2006 eight times more frequently than they did in 2005. There are some reasons for this. For starters, private equity firms have lots of cash and they need places to put it. Mr. Dingleflopper has done all right as CEO of a publicly traded company, but not so well that he can come up with the cash to buy it back all by himself. He needs a different kind of investor, and there are plenty of them who will be glad to get on board.

They are especially glad to do so if, as Dingleflopper has determined, the company stock is undervalued. Why is it undervalued? Who’s to say? Wall Street dumps stock when Paris Hilton gets a cat. Just because people don’t want Dingleflopper stock doesn’t mean Dingleflopper is a flop.

Of course, no one can force the shareholders to sell. Not technically, anyway. But if Carlton J. Dingleflopper IV doesn’t want to work for them, and he started the company, why would Norton C. Beezbloffer Jr. want to come in and take over? Especially if the management team is loyal to Carlton?  And who says you can find anyone unaffiliated with Mr. Dingleflopper who would want to buy the company anyway?

But wait. The board, which works for the shareholders, could ditch Dingleflopper and bring in Beezbloffer with a bonus. That would settle the situation! But remember, the market gets maniacal when Rumsfeld rants and gives France the finger. If Dingleflopper develops turmoil at the top, stock could sink like a stone, leaving shareholders to shudder in the short term.

The answer is to get while the getting is good.

So Dingleflopper gets his company back, and he breathes a sigh of relief that everything is back to normal.

Oh. Except for one thing. He only came out of the transaction with 10 percent equity. Ravaging Wolf Equity Partners controls the other 90 percent, and they got their money from individual investors – some of whom dumped Texaco last week because they heard Cindy Sheehan had bought property in Crawford.

Congratulations, Carlton! You’re free of the shackles that gripped you from the day your IPO brought you all that capital. Except that you’re never really free, because as long as you need capital, there will be someone who has some for you – along with lots of expectations and conditions.

The entrepreneur who establishes a company solely for the purpose of positioning for an IPO – and there are many – needs to be careful what he or she wishes for. If you build, go public and get out, at least you can go to the beach and ponder your next move.

But if you build, go public and stay, it is possible to chase off your shareholders. But that doesn’t mean it can ever be like it was in the salad days. This seems to be the year when Dinglefloppers everywhere are discovering this, to their dread.