Escape From Microcap Hell
Rick Rickertsen began writing his book, Buyout: An Insiders Guide to Buying Your Own Company, before the technology market crashed. So his advice to managers on buying back their companies is littered with terms like "personal fulfillment" and "realizing your dreams."
But while that language no longer resonates in a devastated market, the COO of VC firm Thayer Capital says, if anything, top managers have an even greater incentive now to buy out their struggling companies and become full-fledged entrepreneurs.
"The small publicly held Web consultancies are living in microcap hell," says Rickertsen, who has particular expertise in this sector. Thayer Capital currently funds four private consulting firms: Concours Group, Iconixx, Immedient and Impresa.
Public Doubt Rickertsen says the public market is the bane of professional-services firms that should never have gone public to begin with. For openers, most of them already have been abandoned by serious investors, and their miniscule market caps put them under the radar of the large Wall Street brokerage houses.
"The smart money got out of these companies well before the bottom," says Rickertsen. "The only investors left are the penny-stock [followers looking to] pick up a quick buck on a tiny move."
Moreover, he argues, with their companies trading under their cash values and losing money hand over fist, the last thing managers need is the distraction of public lifethe expense and time involved in filing hundreds of pages of documents, undergoing regulatory scrutiny, and trying to keep employees onboard amid all of the bad news on the street.
Some Advice A VCs dose of advice for managers looking to buy their way back from public life takes the form of having to make tough choices.
For those senior managers desiring to take the plunge, Rickertsen suggests the following:
> Line up an experienced, reliable equity partner, not only for financing assistance but also to help you deal with your fiduciary responsibilities and offer strategic advice.
> Expect a few lawsuits from disgruntled investors, but dont worry too much about them. "Your investors are big boys and girls," says Rickertsen. "If they believe your stock is underpriced, why arent they out there buying more and bidding the price up?"
> Form a "special committee of the board" composed of independent directors, and make sure that all of your directors are behind you.
> Price the deal fairly. Typically, a 30 percent to 40 percent premium over the current price is reasonable. Understand, however, that once you make your offer, youve put the company in play, and if youve underpriced your bid, theres an excellent possibility that some large integrator will come along and grab the company away from you. Remember RJR Nabisco and the barbarians at the gate?
> Write a tight business plan that will impress potential partners with four key elements: a sound valuation, a long-term vision, a differentiation strategy and a first-rate management team. A year ago, equity partners might have glossed right over those things. But not now. The gilded age of technology has passed.
> Dont try spinning your financial partners. They may have been bamboozled by the first wave of Internet hoopla, but by now theyve learned to recognize hype when they hear it.
> And, whatever you do in your business plan, dont build your case around an eventual return to the IPO market. Your goal has to be building, or rebuilding, a business. Weve all seen what happens to consultants who treat the IPO as an end in itself.
Final Chapter? Given all of the negative energy, Rickertsen cant figure out why public consultants havent begun the exodus back to private life. The only explanation he can come up with is that their potential equity partners are reluctant to help fund these transactions until theyre sure that the market has finally bottomed out.
"I know people are looking at it seriously," he says."But the overall economic outlook right now is so gloomy, that private equity firms like Thayer and Francisco Partners are holding off "
While the public IT services firms are getting battered, the private ones also are feeling the sting. But being private has to be better than burning in microcap hell.