by Paul L. Schaye, Managing Director Chestnut Hill Partners, LLC
Even with solid performance and excellent growth prospects, you may find the door to the public equity market slammed in your face.
FEELING UNAPPRECIATED on Wall Street? Struggling to boost shareholder value? Searching in vain for growth capital?
If you head a public healthcare company of small to medium size, the answer to all three of those questions may very well be yes.
Over the last year, healthcare has suffered from modest growth relative to other sectors, and many small cap stocks are out of favor, too. Even with solid performance and excellent growth prospects, you may find the door to the public equity market slammed in your face.
Your troubles may not be limited to secondary offerings of stock. A depressed share price leaves you little room to maneuver. With your currency devalued, acquisitions become difficult or impossible. Lacking the lure of valuable stock options, you may also have trouble attracting the kind of employees you need. And all the while, of course, you have to listen to dissatisfied shareholders clamoring for better quarterly results.
If your IPO champagne has long since lost its fizz, you may want to think about going private. There are currently more than 800 private equity buyers nationwide, who currently hold more than $85 billion in investment capital. The money comes primarily from institutional investors, who are hoping for annual returns on the order of 25 to 30 percent.
Some of this capital will doubtless flow to dot-coms and biotech firms, but a substantial amount of money will also head to strong but neglected players in the old economy. Where stocks have been beaten down, some private equity firms see good companies going for what they consider to be reasonable prices.
Sheridan Healthcare makes an interesting case in point. This Miami-based physician practice management company went public in 1995 and private again in May 1999. Sheridan’s management and board did not set out with this second goal in mind, but they arrived there on the road to maximizing shareholder value.
Bear in mind that PPM stocks were in very deep trouble at the start of 1999, following some highly visible failures in this sector. Sheridan was one of the babies the stock market threw out with the bathwater. Despite a record of meeting its financial projections for seven consecutive quarters, Sheridan’s stock was down to $6 a share from a high of $17.
A deal with Vestar Capital Partners, a leading private equity firm, turned out to be the right move for Sheridan. Together with Sheridan’s management, which took an equity stake, Vestar and its partners acquired the company at a healthy premium to its stock price. While still well below the company’s all-time market high, this was, in the current environment, an attractive price.
Equally important, Vestar agreed to provide Sheridan with the capital it needed to grow.
“We’re contrarians,” explains Mitchell Eisenberg, M.D., Sheridan’s CEO. “We’re acquiring some practices, growing our existing practices, and starting other practices from scratch. All of this takes capital, and Vestar has come through, just as it said it would.”
Although management must still provide the company’s owners with extensive financial data, it no longer needs to do so in a public forum where competitors can see all. Relieved of quarterly earnings pressure, management is also freer to focus on long-term goals. As Eisenberg tells it, the benefits are emotional as well as financial. “I just feel better! I wake up in the morning with a smile on my face. It doesn’t have to work out this way, but our private equity partner has the same views as management.”
Eisenberg notes that other Sheridan executives seem to share the sense of relief. “We kept pretty much the same management team,” he says. “They performed superbly when we were public, but I think they also feel a burden lifted. They don’t have to live quarter by quarter. Now they can live year by year.”
Would a private equity deal be right for your company? If you are an established business with strong upside potential and a capable management team, you should probably explore the possibility.
Private equity firms are particularly interested in companies neglected by the public market.
Valuation, of course, may become a stumbling block if an actual sale becomes imminent. Your board members may balk at a share price well below the peak your company once hit in the public market. You can anticipate some collective soul searching on this score. Try to bear in mind that market realities change, whether for better or worse, and that there is little you can do to fight them. You can expect your company to fetch a premium to its current share price, but not an extra ordinary premium.
In its day, your IPO was an occasion that set corks popping. But today, your best financing opportunities may well be found in the private equity market. It is no longer the season to drink mass market bubbly. It is time to start drinking private reserve.