The Importance Of Being Private - Forbes

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The Importance Of Being Private

Public offerings may be back, but Kohler and other big U.S. private companies show
why going public may not always be the thing to do.
Googles 1.7 billion initial public offering in August gave entrepreneurs reason to rub the sleepy
dust out of their eyes. All year the new-issues market had been slowly awakening. Through the
end of October U.S. companies raised $29 billion in initial stock sales, almost twice the total raised
in all of 2003.
The ten companies in the following table could easily join the 12,000-deeproster of publicly traded
companies. By our calculations, based on estimates of their sales and earnings and on market
values of similar companies, this group is worth at least $140 billion.
Financial-data provider Reuters Group Plc. sells for 2.2 times revenue. Apply that multiple to
Bloombergs $3.3 billion in sales and you get $7 billion. But Bloombergs sales grew an estimated
8% during the 2001-03 malaise on Wall Street, while Reuters shrank by 17%. Using multiples of
sales and profits for companies with similar growth rates, Bloombergs value comes to $10 billion.
The ultimate benchmark is a sale, though the price will include some difficult-to-quantify factors.
Once you get to a ballpark range, the personalities and motivations for selling take over, says
Marc Khouzami, an investment banker at Paragon Capital Partners in New York. Coming up with
the final valuation is almost more of a behavioral study than a financial one.
For some of these ten companies that might be a moot exercise. They sell $125 billion in products
and services each year. Their brandsMars, L.L. Bean, Fidelitywere household names long before
Google became a verb. Yet their owners may never cash out.
What is it about being private that prompts them to pass up the opportunity for shareholder
liquidity and new capital?
For Kohler, the 130-year-old Wisconsin maker of kitchen and bath fixtures, it comes down to longterm planning. When we say long-term, were not talking about three or five years, says Natalie
Black, Kohlers general counsel. We mean generations.
Look, But Dont Touch
Name

Sales ($bil)

Employees (THOU)

Estimated Value ($bil)

Fidelity Investments

9.2

31

45

Mars

18.2

31

35

Cargill

62.9

101

32

Bloomberg

3.3

10

Menard

6.1

27

Publix Super Markets

16.9

125

Bose

1.7

Kohler

3.2

26

L.L. Bean

1.2

Frys Electronics

2.1

Sources: Company information; Forbes estimates; Reuters Fundamentals

via FactSet Research Systems.
Kohler is an exception to the old saw that the first generation earns the money and the third fritters
it away. Blacks husband, Chairman and President Herbert V. Kohler Jr., is a grandson of founder
John Michael Kohler, an Austrian immigrant who created the companys first bathtub by baking
enamel onto a horse trough. Kohler wants to keep the business in the family. He oversaw a
recapitalization of the company in 1998 that makes it harder for him or any Kohler heir to sell
shares to the public. Voting control of Kohlers shares is now held by an ironclad trust that makes a
public offering or any other sale highly unlikely, Black says.
Free from the quarterly pressure of Wall Street conference calls, Kohler is able to be more patient
in its business planning than its public peers. Take Chinaa promising but difficult market for
foreigners. Kohler, which had exported products to China since the 1930s, started manufacturing in
the country in 1991 when foreign companies still had to form joint ventures with local partners.
That was a big risk for us, Black says. There werent a lot of foreign companies making money
in China back then. A lot of public companies might have been forced to pack up and run.
Today all of Kohlers operations in China are wholly owned, profitable and among the companys
fastest growing. Black says: If not for our being private, we probably never would have tried to
enter China.
Kohlers expansion into the resort business is also something that Wall Street might have vetoed. In
the 1970s consultants told the company to tear down a building one hour north of Milwaukee
(originally used as housing for employees) or convert it into offices. Kohler had a different idea:
turn it into a hotel. Kohler later bought an abandoned military airstrip nearby.
No faint-hearted diversification. There was still live ammunition there when we bought it, Black
recalls. It was an environmental nightmare. Today the former airstrip is the Whistling Straits golf
course, which staged the 2004 PGA Championship, and the old building was reincarnated as the
American Club, the Midwests only luxury resort hotel to get the AAAs highest rating. This and a
string of other resorts present an opportunity for synergy, of a sort: The hotels showcase Kohlers
furniture, fixtures, whirlpool bathtubs and power generators.
Among enterprises of their size, the holdouts in the table are the exception. Big companies need
public shares for any of several reasons, says Jon Anda, global head of corporate finance at
Morgan Stanley: they offer a source of new capital, a currency for acquisitions, liquidity for estate
planning and a means to reward employees with options.
Kohlers Black notes that job security can be as alluring in todays shaky job market as stock options
were in the bubble years. Okay, we dont have options, she says. But were not going anywhere,
and were not going to get taken over.

Not that Kohler stock would be such a bad deal: Executives are able to buy and sell shares from
Kohler at book value, which has compounded at an 11% annualized rate over the past 32 years
easily beating the S&P 500 s 7.5% return, minus dividends on either investment.
Bill J. Myrick, chief operating officer of 84 Lumber, which ranks 78th on our list with $2.5 billion in
sales, notes that decision making at private companies can be lightning fast. When his company
was disappointed with gross margins at its 405 lumberyards, he and owners Joe A. Hardy and his
daughter Maggie Hardy Magerko created a new bonus system for store managers that was tied to
both profit and revenue.
Its not that public companies cant do something like that, Myrick says. Its just that we sat down
for two hours and walked out of the room with a plan. Ten days later it was in place and all our
store managers knew about it. After two months under the new system, 84 Lumber had improved
its gross profit margin by two percentage points.
For entrepreneurs used to that sort of flexibility, going public can be a shock. Dominos Pizza Chief
Executive David A. Brandon, who was tapped by Bain Capital to guide the company through its $340
million offering in July, cautions entrepreneurs about getting too comfortable if they have any
planshowever remoteto go public. Once you open your books, the world sees exactly who you
are, he says. For a lot of entrepreneurs used to a close-fisted approach, thats a really torturous
change. He suggests practicing for going public by writing press releases and preparing financial
statements as if you were already public.
The Sarbanes-Oxley law on corporate governance adds a new twist to the long-standing debate
about whether to go public. Its getting harder to find good directors, says Anda. And the people
you want as directors may not be willing or available.
The biggest regulatory burden of being public is filing quarterly and annual financial statements;
Sarbanes-Oxley doesnt change that. Many private companies already comply with some of the
legislations other mandates: documentation of financial controls; having a majority of independent
directors; and havingindependent audit and compensation committees. To the extent that youre
operating the way that youre supposed to, Sarbanes should not be that much of adifficulty, says
Morton Pierce, cochairman of the Dewey Ballantine law firm.
An IPO is a branding event, says Morgan Stanleys Anda. It affects your business; it affects the
morale of your employees. You want it to be successful, especially if youre a family-held company
that has been waiting many years.