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Neglected Firms Get Their Chance to Grow

LBO Firms Are Taking Companies Private And Breathing New Life Into Them
By Joan Harrison

Investor fixation on dot-coin and other hot technology stocks has left many solid small and mid-cap industrial companies out in the cold. With their stock prices trading at all-time lows and with no capital for acquisitions, many find themselves stagnating, even as their sales and earnings rise.

Faced with few, if any, options for growth, these companies increasingly are teaming up with buyout firms in what seem to be win-win deals for both parties. The LBO firms get strong companies at incredible prices while the once-public companies gain access to capital to expand their businesses, and to return, perhaps, to public ownership at some point.

“Wall Street is the herd mentality, and right now the herd is running to technology plays. That has abandoned the clomp-clomp, rusting companies out there,” says Paul Schaye, managing director of Chestnut Hill Partners, an advisory firm to buyout companies. The situation also creates new opportunities for both neglected companies and investment firms that can allow them to get back on the growth track, he adds.

Even though buyout firms are dabbling in Internet and related investments, traditionally, mid-size manufacturing companies have been the bread and butter of their investments. And backed by about $350 billion of private equity waiting to be invested, they’re having a field day snatching up manufacturing companies with pummeled stocks.

“A lot of LBO firms have started to look at e-commerce and Internet businesses, but as the funds have been set up, they are traditionalists in some respects because the metric for how e-commerce will pay off is still unproven,“says Schaye. “So, where can they put their money to work? in good, solid manufacturing companies.”

By taking these companies private, the LBO community provides them with the capital they need to grow and an exit strategy, such as selling to a large conglomerate or another strategic acquirer, or building up the company to a point where it can be public again, Schaye remarks. “One thing that a privatization allows you to do is to take a public company private, roll things into it, then take it public again.”

For shareholders that are frustrated with the stock price and managers who have their net worth tied up in these companies and see the value of their stock options evaporating, they get a nice premium out of the deal. “For us, we consider it to be good timing. It’s a fair price in light of the circumstances,” asserts Norm Alpert, managing director of Vestar Capital Partners a New York private equity firm.

Two or three years ago, valuations of small companies were very high, says Alpert, and firms like his saw no value in those companies. “Everybody in our business was taking medium-sized companies public, because that was the best value. Now the opposite is the case. These companies are very undervalued and so they make for a terrific buying opportunity, but it will not remain that way forever,” he cautions. The last four investments that Vestar has made, Alpert notes, have been either going-private deals or transactions created by the inability of a company to raise public money.

Schaye agrees that eventually there will be a creeping up of prices for these moderate-sized industrial concerns, once they start gaining the attention of Wall Street and investors, but he doesn’t think their stock prices will return to their pre e-commerce levels, or make them comparable to investment opportunities people are seeking in other stocks.

Alpert says that public-stock money-managers are now starting to reallocate some assets to smaller-cap companies, which will increase demand for those sorts of stocks, but will make them much less attractive to private investment firms.