James Cassel, co-founder and chairman of investment banking firm Cassel Salpeter & Co., LLC, recently met with columnist and radio host Jim Fried to talk about how mid-sized companies can locate and access capital to grow their businesses. The taped segment was featured on Miami radio station 880 AM “The Biz” and can be listened to by clicking the media player below.
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By James S. Cassel
Special to the Miami Herald
October 19, 2014
Everyone knows initial public offerings can flood company coffers with cash, make people wealthy, and based on my experience in investment banking, I often get asked the following question by middle-market and growth-company business owners: “Should I take my company public?”
Fact is, in recent years being public has become much tougher as a result of increased regulations requiring tremendous disclosure and compliance with the Sarbanes-Oxley Act as well as other rules and regulations. For public companies, keeping up with compliance requirements alone can cost hundreds of thousands of dollars per year. Moreover, the required disclosure could give information to your competitors that you might not want them to have. So, as you would do with any major business decision, you should carefully weigh the pros and cons to make sure this is the right step for you as well as your company.
Here is some general advice I have found to help business owners as they begin to navigate these important questions.
Although the decision-making process that precipitates a business going public is thorough and multifaceted, it can generally be boiled down to one or more of these four considerations: to raise cash for general or specific business purposes to spur growth; to have a public currency for acquisitions; to provide liquidity for current shareholders; and to use the public currency and options to recruit, incentivize and retain employees.
There also are other intangible but equally valuable benefits, such as credibility.
A successful public offering is considered a major milestone and achievement for a company. It can create a sense of corporate stability and strength. An IPO, particularly if it gets positive media coverage, also can create good “conversational capital” for companies in terms of putting them in the limelight and making them more top-of-mind among key audiences. Depending on the type of company you own, this could be very good for your business.
A Deloitte survey conducted by OnResearch, a market research firm, polled 509 executives from March through April 2014 at U.S. mid-sized companies about their expectations and plans for becoming more competitive in today’s economic environment. Of these, 8 percent said they were likely to go public in the next 12 months (twice the number recorded in the fall) and cited the following reasons for doing so: broader exposure for their brands and products (36 percent); the cost-effectiveness of equity capital (35 percent); the desire to provide liquidity for owners (34 percent); and the need for capital to fuel growth (33 percent).
According to the survey, the most common reason private companies would want to stay privately owned is the need to control or have greater flexibility in spending, which was cited by almost three-quarters of the respondents. Other reasons for wanting to stay privately owned include: the size of the organization (too small to consider an IPO); the desire to keep financial information private; and concerns about compliance with the strict regulatory requirements of being public.
How do companies go public? Though there are other avenues, companies go public primarily through an IPO or by merging with an existing company in a reverse merger. In some cases, this can be accomplished through a shell company that may or may not have cash, although that may not be the preferred way to go depending on the circumstances. Every situation is different, so it’s up to the parties to confirm whether they are getting the value they are looking for and whether there is a liquid market for stock of the company.
Bear in mind, there are all sizes of underwriters, and not every business goes public through firms like Goldman Sachs or Citigroup. Many notable middle-market investment banking firms have similar expertise for smaller offerings, such as Ladenburg Thalmann, with headquarters in Miami, Noble Investments in Boca Raton, and Maxim or Aegis Capital Corp. in New York City, to name a few.
Each might look at different size offerings and each may have a different industry focus.
While the costs of going public are as voluminous and complex as the reasons, a few stand out as unavoidable and considerable expenses. Chief among those are legal expenses, accounting fees and investment banking fees as well as the internal costs of manpower. Many of these costs are ongoing. So in addition to the upfront costs of going public, there are costs of staying public that businesses incur when they make this transition. The rigors of the IPO regulatory process require tremendous disclosure and require much time and attention. The costs of staying in compliance can easily run from several hundred thousand to more than a million dollars per year in additional expenses.
With this in mind, it’s crucial that companies approach going public with a clear picture and realistic expectations. In an ideal world, companies should spend time working with a financial advisor with experience in public offerings to evaluate the offering options that might be available as well as the most appropriate parties to consider working with. There is no linear path to a public offering, but intelligent planning and forethought can make navigating the process more manageable for companies of any size and help ensure they minimize the obstacles and maximize the benefits.
James Cassel is co-founder and chairman of Cassel Salpeter & Co., LLC, an investment-banking firm with headquarters in Miami that works with middle-market companies. He can be reached at email@example.com and www.casselsalpeter.com
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By Robert Barba
October 16, 2014
Last week’s conservatism can become this week’s wise move in bank M&A. Take Greater Sacramento Bancorp, the holding company of the $468 million-asset Bank of Sacramento, which on Wednesday announced plans to sell itself to AmericanWest Bancorp in Spokane, Wash., for $60 million — in cash.
“Cash looks far better right now. Stocks go back and forth and our board made the decision that it was of the attitude that ‘cash is cash,'” William Martin, president and chief executive of Greater Sacramento, said Thursday, the most intense day of a weeklong stock market slide. “You know what you’re getting.”
That attitude had become passé until recently. So much of the M&A activity of the past couple of years has been predicated on the market’s treatment of bank stocks. Sellers could be sold on the upside potential of taking another bank’s supposedly undervalued stock as a consolation for a low premium. As the rally matured, banks with high-flying stock multiples had the type of currency where they could offer sellers a decent price without incurring too much dilution.
But the recent market volatility is a reminder that cash offers, despite their lack of potential upside and real tax implications, can provide a sense of certainty that stock deals cannot.
The Greater Sacramento deal has been in the works for more than a year, long before the market falloff of the past week, but persistent volatility contributed to the company’s decision to take a cash offer, Martin said. Bank stocks rose roughly 40% last year and the board just could not buy into the idea that there was still more room for them to go up.
“We had a couple of stock offers, but we were very nervous in some of the stock that was offered,” Martin said. “They were high-flying and we wondered how much can it continue to go up? It can’t happen forever.”
More sellers may start to share that view, says James Cassel, chairman and co-founder of Miami investment banking firm Cassel Salpeter.
“It all depends on how you perceive the buyer. Is its stock undervalued, fairly valued or overvalued?” Cassel said. “You might have a great opportunity if it is undervalued or fairly valued, but some of the bank stocks that we thought maybe had some upside have shown us recently that maybe they didn’t.”
AmericanWest is paying Greater Sacramento shareholders 152% of the seller’s tangible book value, or $22.05 per share. The price is high — the average price paid in the third quarter was 128% — but worth it, said Scott Kisting, the CEO of AmericanWest. The deal fleshes out the company’s presence in northern California, where it currently encircles Sacramento. It will also push the bank’s assets to roughly $4.5 billion, with $1 billion in northern California.
The above-average premium “is what it took to do the deal,” Kisting said in an interview on Wednesday. “But we expect it be accretive in the first year — very accretive — and will cover our one-time merger costs.”
AmericanWest is the bank unit of SKBHC Holdings, a private-equity-backed entity formed in 2010 with $750 million in capital; SKBHC bought AmericanWest in a bankruptcy auction. Since then, the company has announced eight other acquisitions, including the Sacramento deal, and has tapped $485 million of the capital. Its last deal, for the $1.2 billion-asset PremierWest in Medford, Ore., was completed in April 2013.
The company took some time away from M&A to focus on the PremierWest deal, but Kisting said he returned to a much more difficult M&A environment. The company has been on the prowl but has been beaten out on several occasions by buyers with rich stock premiums.
“We’ve been looking, but as a cash buyer it is harder,” Kisting said.
His comments echo the problem several of the roll-up vehicles around the country are experiencing. The number of bank failures did not live up to expectations, and healthy sellers have often favored stock. Even those companies that have gone public are struggling to do deals because their stocks are not trading at the same multiple as more established buyers.
But Kisting returns to the idea that when the market gets topsy-turvy, cash suddenly looks better.
“When volatility goes up and down the certainty of cash has a huge advantage,” he said.
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