Stock Market Exit Strategies

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After 12 years as a public company, business travel agency Hogg Robinson recently booked a trip for itself: a one-way flight out of the London Stock Exchange. ceo David Radcliffe led a nearly $450 million management buyout of the firm with financing from Schroder Ventures. Radcliffe saw that as the best solution for a common business dilemma: though Hogg Robinson was healthy and profitable, its share price had slumped because investors considered it too small to offer "exciting double-digit growth," Radcliffe explains. With depressed shares, the company found it hard to grow and make acquisitions. So on May 10, its board agreed to accept management's bid of $4.28 per share, or 57% more than its market price.

Hogg Robinson's exodus is not rare. A growing number of U.K. and Continental companies mostly from out-of-favor, Old Economy sectors are de-listing from stock exchanges and going private. Freed from having to please investors every quarter, many smaller companies find it easier to grow or reinvent themselves when they are financed by private equity funds and banks. Kohlberg Kravis Roberts & Co., the legendary buyout firm that became synonymous with the takeover craze that swept America in the 1980s, recently created a $3 billion European fund and started scouting the Old World for new deals. "There are lots of opportunities here," explains Ned Gilhuly, managing director of KKR's European operations in London. "We believe there will be more, and sizable, deals in Europe." So does London private equity firm BC Partners, which last month topped KKR by raising a $3.27 billion fund.

According to the Centre for Management Buy-out Research (C.M.B.O.R.) at the University of Nottingham, there were 45 public-to-private deals in Britain in 1999, worth $6.83 billion, up from 27 worth $3.98 billion the previous year. And KPMG Corporate Finance says the growth is continuing this year: deals during the second quarter were worth $8.7 billion, a whopping 334% increase over the first quarter. In Western Europe, the trend is even steeper: 27 deals worth $3.84 billion last year, a huge increase over the three deals worth $224.3 million in 1998. Significant transactions include KKR's $940.5 million acquisition of British conglomerate Wassall, whose primary holding is Thorn Lighting, and the $1.4 billion buyout of Friedrich Grohe, the German bathroom fixtures maker, led by BC Partners.

It is the New Economy that is driving many firms out of the stock market. As investors focus on big growth, high-tech stocks, smaller non-tech companies don't show up on their radar, even if they are profitable and growing steadily. Martin Bolland, a partner at Alchemy Partners, a London private equity firm, says that because smaller firms are hard to keep track of, "they are an inefficient way of investing" for fund managers. Of the companies that have gone private so far, more than 90% are in traditional industries such as paper, textiles, food and water, reckons Mike Wright, director of the c.m.b.o.r. "The main motivation is that these companies are not really getting a fair valuation in the market," he says. And that's a Catch-22 problem for any company unwilling to stagnate. Investors favor bigger companies, but smaller companies with depressed share prices can't do the things needed to grow, like make acquisitions or fund new products and aggressive sales and marketing campaigns. It's a frustrating situation for managers, KKR's Gilhuly says. "They feel that they have delivered the goods, but the market will not reward them."

America's '80s buyout phase mostly bypassed Europe. There were fewer European public companies then, and the shareholder culture that's only now getting established here didn't exist to give corporate raiders a milieu in which to operate. But what's going on now is no replay of '80s America, Wright insists. That era was marked by hostile bids and huge, massively leveraged deals often financed with high-risk, low investment-grade junk bonds. Today's deals are rarely hostile, and debt levels are more manageable. Today's mantra is "buy and build," or "platform investing," says John Muse, co-founder of Hicks, Muse, Tate & Furst, KKR's main U.S. rival. Once a company has been taken private, the idea is to build it up via acquisitions. Banks are often willing to lend to newly private companies, says Steve Russell, HSBC Investment Bank's U.K. strategist, "because they expect the equity funds will keep them fiscally disciplined."

Shareholders generally accept that going private is often the only resort for some companies. But some share prices are so depressed that even when premiums of 50% to 60% are paid, the deals don't fully represent the companies' value. Still, Russell adds, going private "is often the best option for shareholders," because many of these companies are in sectors that may never rebound. So what can buyout specialists do with these companies once they've been pumped up? Alchemy's Bolland says it's usually easy to sell the revamped companies to bigger competitors. "It's really all about consolidation," he says.

And consolidation is good, claim today's buyout barons. They see themselves not as corporate raiders stalking bloated conglomerates, but rather as value hunters salvaging sound companies unloved by today's stock markets. More like white knights to the rescue than barbarians at the gate.