Leaving Wall Street--and Going Private
For someone who has had a hand in hundreds of high-tech initial public offerings since 1969, Sandy Robertson has been making a surprising pitch to tech companies in the past year: Let me take you private. True, many boards aren't yet ready for the overtures of the former Silicon Valley investment banker. "I'll offer $6 for a stock that has fallen from $30 to $4--but the board is convinced it's going back to $20," says Robertson, who now runs Francisco Partners, one of a handful of private equity funds focused on taking tech companies private. "But once that price has stayed at $4 for a year, we'll see those guys again."
That day may come sooner rather than later. With technology reporting some of the worst earnings on Wall Street and with once-acquisitive companies in retreat, weak stock prices have left many companies suddenly considering the option of taking all or part of themselves private again. Conglomerates such as Hyundai, Motorola (MOT ), and Xerox (XRX ) are in talks to turn slow-growing or money-losing divisions into private companies of their own. Even mature companies in out-of-favor markets, such as Novell (NOVL ) and 3Com (COMS ), are considered candidates to go private. "There are many companies trading at a discount to what they would be worth if they were private," says venture capitalist David F. Marquardt of August Capital.
Indeed, as valuations plummet, many more are looking to take advantage of such gaps. In 2000, 17 tech outfits worth $13.6 billion went private, including drive-maker Seagate Technologies (SEG ). That's up from four deals worth $1.6 billion in 1998. And this year, things have intensified. On May 14, Seneca Investments announced it was making a bid to take Agency.com, a Net consulting firm, private. Earlier this month Los Angeles takeover firm Gores Technology Group bought the Verifone division of Hewlett-Packard (HWP ), a $350 million unit that makes credit-card readers, as well as Micron Electronics' (MUEI ) $1 billion PC division.
So whose divisions are said to be in play? Hyundai's semiconductor memory business; Lucent Technologies' (LU ) optical fiber division; Xerox Corp.'s Palo Alto Research Center, and its share in a year-old venture to build ink-jet printers with Sharp and Fuji Photo Film Co. (FUJIY ); and Motorola's Integrated Information Systems Group, which makes communications systems.
The reasons are many. After years of spending freely to chase Net ventures, many CEOs have crimped budgets. Now, they're focusing on the core, strategic businesses that pay the bills. Indeed, shedding slower-growing or money-losing businesses will lift quarterly earnings. "One way to make good on that 15% growth target is to sell the divisions that are growing 5% and 10%," says Jim Coulter, a partner at Texas Pacific Group, which has been taking firms private since 1993.
Consider HP's decision to sell its Verifone division. By completing the deal before it announced earnings on May 16, HP cleared the slow-growing unit off its books. What's more, the company stands to get an undisclosed cut of future earnings from Gores.
If Wall Street valuations for tech giants remain underwater, some household tech names could go private as well. Already, Texas Pacific Group, Kohlberg Kravis & Roberts, and Silver Lake Partners have approached Xerox with deals aimed at taking a controlling stake in the company, but talks went nowhere. Industry insiders say dealmakers have also been sniffing around 3Com, Novell, and, most notably, Apple Computer (AAPL ).
REVOLTS. Of course, going private isn't for everyone. Nobody wants companies with no cash flow or products in danger of becoming obsolete. What's more, companies risk shareholder revolts if they accept low-ball bids. Says shareholder rights expert Nel Minow: "We don't want to see any fire sales--but it may be that going private is the best way for shareholders to get some value [from their tech holdings] these days."
Still, going private has plenty of advantages, say executives who have tried it. Since Seagate went private last November, CEO Stephen J. Luczo no longer has to devote 35% of his time to wooing Wall Street. "I'm doing the things a CEO should be doing," he says. Now, he focuses on operations and morale and is free to make long-term investments that would have previously trashed the stock. He's now investing heavily to move into more lucrative storage-equipment businesses, for example, rather than just selling commodity disk-drives. "It's like we pulled into a safe port, just as all those other ships were heading into stormy seas," says Luczo. Many others may find such protection attractive in the coming months.
By Peter Burrows in Silicon Valley