(Photo by Brian Baiamonte)
The billboard business was consolidating during the mid-1990s, leaving privately held Lamar Advertising with a stark choice: Be a gobbler, or be gobbled. Company leaders chose the former, which meant raising lots of money.
“We elected to go public to participate in the rollup of our industry as an acquirer rather than a seller,” says Lamar CEO Sean Reilly (above), who at the time directed the Baton Rouge-based company’s merger and acquisition efforts.
He says the industry shift came at a good time for Lamar, a family-owned business with young, aggressive managers and field leaders who were ready for new challenges. Going public also allowed owners who weren’t involved in the company to cash in, which may have been important, since tension between active and passive owners often derails family businesses.
“The odds of a company surviving as a private entity through four generations are pretty daunting,” Reilly says. “For us, [going public] probably was one of the ingredients that helped us survive and thrive through another generation.”
Companies offer stock to funds, institutions and the general public to raise capital and get bigger, and to monetize the business without selling the whole thing. Lamar’s stock sales raised enough money to buy out competitors and retire expansion-related debt, and today it’s an industry leader.
But going public is costly and time-consuming, brings intense scrutiny, and involves giving up at least some measure of control. It’s not unusual for a founder to get tossed out of the public company he started. If you’re a company leader thinking about making the leap, experts recommend serious soul-searching to make sure the decision is driven by what’s best for the company, not your ego.
When asked about taking companies public, Gary Graphia, a former Shaw Group executive, has a joking stock answer: Don’t. It’s an expensive and onerous process, and when it’s over, you’ll have new administrative costs and lots of new people looking over your shoulder, some of whom care more about the next day’s stock price or the next quarter than the overall health of your company.
“In today’s financial world, the investors are less patient and more demanding of short-term results, rather than investment for the long term,” says Graphia, now of counsel with Kean Miller.
In 2006 when Shaw and Toshiba bought Westinghouse (Shaw later sold its stake to Toshiba), Graphia says the American investment community was preoccupied with the near-term implications of the deal. Toshiba, by contrast, seemed “clearly focused on a very long-term, even a 50-year horizon.”
Company owners often hang on to a plurality of the shares. But maintaining control might put off large investors who want to influence the direction of the business. A CEO who wants to stay in charge hopes his success making the company worth investing in will make others confident in his ability going forward.
“You have to be diligent in fitting your decisions in the short term to contribute to the long-term plan,” says Lewis “Bucky” Kilbourne, an adjunct assistant professor of finance at LSU. “If you don’t perform on a quarterly basis, your company’s stock price will suffer.”
Kilbourne has been chief financial officer with five publicly held companies. He helped take Popeyes Famous Fried Chicken & Biscuits public, allowing founder Al Copeland to raise capital and make his ownership liquid. Kilbourne also co-founded a supply chain management software firm that he took public in 1997, which he says was a necessary step for that company’s growth.
Kilbourne says it can take six to nine months to transition from private to public and cost at least $1.5 million. Securities are heavily regulated, and the Sarbanes-Oxley Act of 2002, meant to crack down on fraudulent accounting and improve the accuracy of corporate disclosures, added new burdens, which might be why the number of public companies went from about 6,600 in 2000 to about 3,400 in 2013, says Tulane University economist Peter Ricchiuti.
“It used to be that going public was sort of the Holy Grail,” Ricchiuti says. But some companies don’t want to get on the “short-term oriented treadmill,” which “really hurts long-term thinking.” CEOs at large public companies can spend half their time just meeting with major shareholders, he adds.
Potential public companies don’t need to be very big, but they need a compelling story about revenue and growth potential to tell investors, says Brenda Hamilton, a Florida-based attorney who specializes in taking companies public. She says smaller firms can file with the Securities and Exchange Commission and sell stock themselves without the expense of an underwriter.
“Not all companies need hundreds of millions of dollars to enhance their operations,” Hamilton says.
Graphia says companies with ambitions no bigger than $100 million in annual revenue probably can find cheaper, easier ways to raise money. On the other hand…
“If your ultimate goal for the company is to prepare for infinite growth,” says Graphia, “then perhaps going public is a good option.”
THE RIGHT REASONS
Going public allowed Lamar to thrive at a time when the outdoor advertising business was rapidly consolidating. But now that Lamar is one of the three biggest companies in its industry, its era as a gobbler may be over, beyond a few smaller acquisitions here and there.
No longer having as much need for free capital, Lamar recently converted from a traditional public company to a real estate investment trust. The change requires distributing 90% of the company’s income to stockholders, and makes Lamar more attractive to large funds and institutions that like to invest in real estate.
Reilly says going public has been a positive move for his company, and says his board has been good about letting management plan for the long term.
When asked his advice for business leaders thinking about going public themselves, Reilly suggests they look in the mirror and ask themselves if their organization has the managerial bench strength and accounting wherewithal to handle it.
“Make sure you’re leaping for the right reasons,” he says. “Make sure that you’re going to be able to grow your business, and that your folks are going to prosper. It’s not always sweetness and light out there. You’re going to stub your toe, and everybody gets to see it.”