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May 1998: With the Neff Corp. banner flying above the New York Stock Exchange trading floor, executives of the Miami equipment leasing company culminated their initial public offering by hitting the opening switch that jump-started the daily trading frenzy. A photographer captured the moment as investment bankers from Morgan Stanley, which led Neff’s IPO, cheered as the first trade was executed. “It was a very exciting, very positive day,” said Kevin Fitzgerald, Neff’s president and chief executive. Fast-forward two years. Neff’s share price is trading 64 percent below its IPO price and now, in a dramatic turnabout, Fitzgerald is trying to take the company private again. Early this year, the company’s board of directors received a $9 per share buyout offer from senior managers. (Neff’s current share price is $5.06, way off its 52-week high of $18.43.) Neff is not the only South Florida company that’s looking to pull out of the stock market. In the face of a punishing, volatile market, executives and other investors are having second thoughts about the expenses, the regulatory scrutiny and the second-guessing that go along with being publicly traded. The unrest is especially noticeable in non-tech companies, which feel abandoned and underappreciated by Wall Street investors, who — even with the recent turmoil — remain infatuated with so-called New Economy stocks. Old Economy companies — such as leasing companies, restaurant chains or traditional finance companies — are calling on lawyers, private investors and even banks in an effort to undo their legal and financial ties to the public equities markets. “We’re seeing an increase in inquiries right now,” says Steve Sonberg, a partner at Holland & Knight in Miami. Sonberg says that he has three clients that are in various stages of going private. And while not all may go through with the move, going private is on the rise. Statistics from Thomson Financial Securities Data Co. and Miami Daily Business Review research point to the same conclusion. The number of companies going private in the first five months of this year exceeds the total for all of last year. In 1999, three Florida companies were taken private by either senior managers or a team of private investors, according to Thomson Financial. So far this year, four have announced buyouts designed to take their companies private. “It’s fair to say there is plenty of activity in Florida,” says Jim Elrod, a managing partner with Vestar Capital Partners in New York. His firm supplied some of the capital used to take Hollywood, Fla.-based Sheridan Healthcare private last year. A lot of companies are considering the move, says Elrod, who finds his buyout candidates through investment bankers or by looking at stocks that are trading below their 52-week lows. The recent spate of management-led buyouts has echoes of the late 1980s and early 1990s, when high-profile leveraged buyout (LBO) teams financed multibillion-dollar transactions by borrowing heavily from banks and from the high-yield bond market — so-called junk bonds. Kohlberg Kravis Roberts & Co.’s 1989 buyout of RJR Nabisco for $26 billion is often cited as the definitive deal of that era. The philosophy of the LBO involved selling off parts of the newly private company to pay down the debt taken on to finance the acquisition. After a few years, thanks to the efforts of a management team newly energized by the incentives of part-ownership, the company would once again be taken public, and executives would cash in their holdings. But following the collapse of the high-yield bond market and the crackdown on highly leveraged loan transactions by federal bank regulators, the LBO market slowed down during the early ’90s, especially as commercial banks became more cautious about lending LENDERS TAKE NOTICE Today, bank financing of leveraged transactions is a far cry from the free flowing levels of the go-go ’80s. But the bargain-basement values of some middle-market and small-capitalization companies — those with a stock market value of up to $500 million — have caught lenders’ attention, says Stephen Larson, a managing director of Cornerstone Equity Investors, a New York investment firm. “Small and mid-cap companies have been depressed so much in value that you can do buyouts with those companies even with the more conservative lending levels available,” says Larson. His company, which has raised over $1.2 billion to invest in buyouts � not including funds borrowed from other sources � led the management buyout of Miami-based Equitrac in 1999. At the time Equitrac’s stock price was depressed, and the company lacked a following on Wall Street. And as investors continue to shun small and mid-sized public companies, private equity funds, which have raised billions of investment dollars, will remain on the prowl. “Firms like ourselves are looking at small public companies,” says Larson. “The [stock] market does not appreciate small-cap companies. The market does not really value them appropriately.” A low share price is the common thread in nearly every buyout. Typically, an undervalued company is part of an out-of-favor industry group or a company that disappointed Wall Street and was never forgiven, despite a subsequent turnaround in financial performance. Neff’s Fitzgerald declined to comment specifically on the Neff buyout transaction, but said that a poor market reception “causes a company to question the reasons for being public.” A low stock price prevents a company from using its shares as currency to pay for acquisitions. That’s because too many shares would have be to paid out to complete a purchase. What’s more, potential merger candidates look skeptically at accepting shares that seem to have limited upside potential. Undervalued shares can also torpedo employee morale by making employee stock options worthless, because the stock price trades above the price at which the options can be exercised. And although an undervalued company enjoys few of the benefits of being public, the burdens and costs of public disclosure and compliance with Securities and Exchange Commission regulations remain the same, says Sonberg. “The principals will say, ‘Hey, why are we going through the hassles of being a public company when we’re not getting the recognition from the Street?’” says attorney Dale Bergman, a senior partner in the corporate securities department at Broad and Cassel. Typically, the move to go private is initiated by the leaders of a company. That could mean top executives seeking a management-led buyout or controlling shareholders who want to buy out minority holders. The buyout team can either borrow money to finance the transaction or turn to a private equity fund with deep pockets. NationsBank provided a bank loan to help finance the 1999 leveraged buyout of Sheridan Healthcare. That transaction was also funded by Vestar Capital Partners, which since 1988 has completed more than $7 billion in transactions. Taking a company private is similar to venture capital investing, with a few key differences. While venture capitalists deal with private early-stage companies, private equity investors that specialize in management buyouts target mature public companies. Moreover, private equity investors say they exercise more control over their acquired companies than do the venture capitalists who bankroll start-ups. But in both cases, the goal is the same: Buy today at bargain prices in hopes of a fat payoff in a few years, says Bergman. Like venture capitalists, private equity investors typically hold their portfolio companies for five to seven years. RECONFIGURATION The exit strategy could include a private sale of the acquired company, either to a corporation in a similar industry or to another investment firm. Or they can go the route of the LBO artists of the ’80s, who profited handsomely by dismantling and selling off parts of large conglomerates or repackaging them separately for public stock offerings. “We can reconfigure the company and take it public as a large company. We can take it public as a different type of company,” says Larson of Cornerstone. The management team benefits because the transaction typically gives them a larger share of the company, with greater control and a slice of the earnings pie. And while retaining or gaining more control, some company executives use the buyout to sell a portion of their personal stock holdings. For instance, senior managers at Equitrac contributed $7 million in equity to the buyout, but cashed out at $22 million. NOT CHEAP OR EASY But going private is neither cheap nor painless. The services of lawyers, investment bankers and even financial printers are part of a tab that can start at $100,000 to $200,000, or a lot more, depending on the size of the company and the complexity of the deal, says Sonberg from Holland & Knight. The price tag for taking Equitrac private ran up to $5 million. What’s more, going private can spark lawsuits from disgruntled shareholders, who may feel that the buyout team is offering a low-ball price or that the board is handing insiders a sweetheart deal. Class-action suits or the threat of suits have accompanied several management-led buyout announcements, including a suit filed this month in Broward Circuit Court by a disgruntled shareholder at Roadhouse Grill Inc., a restaurant chain based in Pompano Beach. The shareholder seeking to block the deal argues that the proposed price in the management-led buyout is inadequate. It’s a common refrain in management buyouts. “The suits are frustrating,” says Larson, whose firm was sued in connection with the Equitrac buyout. He refused to comment specifically on that suit, but said, “I don’t think you can do anything in a public company without opening yourself to a lawsuit.” The Equitrac lawsuit was settled by raising the percentage of shareholders — excluding those affiliated with the management team — required to approve the deal. With the exception of paying the plaintiffs’ legal fees of $310,000, no cash exchanged hands. Hollywood, Fla.-based Sheridan Healthcare was also sued by dissidents last year. That suit was settled when the amount payable to the suitors if the deal collapsed was reduced. The deal was eventually approved. Sometimes, news of a management buyout proposal can spark a bidding war for the company, with a third-party suitor making a richer offer. That’s what happened to Pollo Tropical in 1998, when a Burger King franchisee outbid the company’s founder, who wanted to take the company private. “Of course, the directors were obligated to accept the better deal,” says Bergman. With the year less than half over, more going-private announcements could be in the offing, especially if the market continues to slide. “You may see more [efforts to go private] as valuations get cut down in the market,” says Bergman.

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