One of the driving goals of entrepreneurs is to start up a company, and then take it public through an IPO (initial public offering). Is the prospect of realizing great gains by going public that feeds the venture capital frenzy. During the dot-com glory days, many companies with no revenues – indeed, with prospect of revenues in the foreseeable future – went public and consequently made their investors very rich.
The Washington Post article provided below offers a story of a company that has just “gone private” after being public for a number of years. The story makes it clear that there is nothing automatically good about going public. In fact, for serious businesses, there can be important drawbacks.
Read the article carefully, and then bring together your business wisdom to answer the following questions:
- What was the driving force for Deltek going public in the first place? Was there merit in this logic?
- What advantages did Deltek find in going public once it became a public company? What disadvantages did it face?
- What distinguishes Deltek from the dot-com companies that rushed to go public? Why did those companies go public? Who gained?
- Why did Deltek decide to leave the public arena and become a closely held corporation once again? Do you think its management made the right decision?
Your response should be no longer than three pages (single spaced typing).
washingtonpost.com
Private Life Suits Deltek Just Fine
Once-Public Va. Firm Glad to Be Beyond the Scrutiny of Stock Market
By Nicholas Johnston
Washington Post Staff Writer
Monday, May 19, 2003; Page E01
Kenneth E. deLaski just smiles when he remembers the day last June when the ticker for Deltek Systems Inc. disappeared from the stock market.
“I felt the weight of the world was off my shoulders,” he said recently, as the one-year anniversary neared. “Obviously, I’m extremely glad.”
In his five-plus years managing a publicly traded software company, deLaski dealt with a litany of corporate trials: a seesawing stock price, an industry in turmoil, the end of the technology bubble, the scores of meetings with stock analysts and the grueling process of compiling financial data every three months. In the end, he learned that being public, what was one of the grandest prizes sought by technology executives during the boom, wasn’t all it was cracked up to be.
At the beginning, “it was very exciting,” deLaski said. “All the lawyers, all the attention. It was a lot of fun,” deLaski said. “But it got real old after a while.”
So deLaski did what a small but significant number of other companies have done: He bought back all the public stock held by investors, taking the firm out of the public markets and back to its beginning as a privately owned firm.
“Going-private transactions” have held steady at about 75 a year for the past five years, according to Mergerstat, a mergers-and-acquisitions research firm used by investment banks and other financial companies.
“In the current market, the cost-benefit analysis is a large driver,” said Jonathan M. Aberman, an attorney at Fenwick & West in Washington. “The expense of being a public company may outweigh the benefits of being a public company.”
Deltek was founded in McLean in 1983 by deLaski’s father, Donald deLaski, an accountant who specialized in navigating the complicated rules of government contracting. With $250,000 and the help of two hired programmers, the deLaskis developed software around those accounting skills and sold it for about $10,000 to local companies. There were 12 sales in all of 1984, as the younger deLaski did everything from product support to marketing.
By the end of the decade, annual revenue had grown to about $15 million and the company began to configure its software for larger customers. By the time Kenneth deLaski took over in 1996, revenue had grown to more than $30 million and Deltek had more than 300 employees.
Those years also marked the first stirrings of the technology boom.
“The period between 1995 and 2000 was marked by the coming public of hundreds of software companies,” said Robert B. Austrian, an analyst who tracks software firms and used to follow Deltek. “Lots of companies that had been or would have remained private went public.” Austrian’s investment bank managed Deltek’s public offering in 1997, but it has no relationship with the company now.
There are many reasons for a company to sell shares to the public. Some do so to raise money to fund further growth, even if they operate at a loss — a practice that was rampant during the boom. Others do so for the visibility or prestige offered by being a publicly traded stock. And many investors in technology firms used initial public offerings to cash in on the inflated prices that others were willing to pay for tech start-ups.
For Deltek, it was a little different.
The company was already profitable, and the only investor was the founder, who wasn’t eager to sell his stake. Scores of employees had been given stock options in the company, but they, as long as the company was private, had no market for selling them. That’s what deLaski said caused him to take Deltek public.
“Stock options back then were a big deal,” said Austrian. “The only way to make them tangible was to be public.”
Deltek sold 2.9 million shares of stock in late February 1997 for $11 each. Deltek reported growing sales and strong earnings, and the stock rose during the summer. By August it had doubled, and for the next year and a half, it seesawed, dropping below $15 per share and peaking at $24.50.
Many software stocks had been bid up in the frenzy surrounding the Y2K problem, a software glitch that threatened to crash scores of programs when the clock struck midnight Dec. 31, 1999, and older programs couldn’t recognize the new year, 2000. But when nothing significant happened, and the market realized that the fear that drove sales was abating, software stocks tumbled. Within four months, the entire tech stock market began to crash.
“One by one, just about every company went down or saw difficulties in its market,” said Austrian. “Deltek, like any other company at the time, was affected.”
Deltek’s earnings growth had begun to slow in the middle of 1999 anyway, leveling off at about $25 million in sales each quarter. The company was still quite profitable, earning more than 20 cents per share, but the share price began to suffer. A company’s stock price is not so much based on what it earned today, but what it will earn tomorrow.
“Growth is the big driver,” said one former public company chief executive. “People are buying a future story.”
Tyranny of the Quarterlies
Lori Becker remembers the quarterly reports. A longtime Deltek employee, she became the company’s chief financial officer in 1999. Four times a year, public companies have to publish data on their financial performance. Lawyers and accountants pore over the company’s financial information. For Becker, the added workload was tremendous.
“It’s as if you’re under a continual audit,” she said. “By the time you get the [filing] out, you’re a month and a half into the next quarter. And you’re still reporting on history.”
Those quarterly disclosures also help feed the public market’s constant need for growth, and its insatiable demand to meet projected earnings per share, or EPS. If a company does better than forecasts or estimates by analysts, even by as little as a penny, the boost for a company’s stock can be tremendous.
The focus on that number, deLaski remembers, was maddening. “You really can’t help yourself but be focused on scaring out every EPS penny,” he said. “God, please let it be 14 cents, not 13 cents.”
That focus shifted the company’s attention away from long-term goals, deLaski said. All that was important was the stock price, and all that drove the stock price was the number the company reported every three months.
In the spring of 2000, rising costs and flat sales growth finally took their toll on the bottom line. Earnings per share in the second quarter were just 5 cents, a fifth of what it had been a year earlier. Deltek stock, which months earlier had shot up over $20 per share, began a long slide.
The Internet bubble had burst, and even more troubling for software companies like Deltek, MicroStrategy Inc. had just restated its earnings, sparking a firestorm of questions about how all software firms report earnings. Before the summer was over, Deltek shares would drop below $8 for good.
Earnings recovered somewhat later in the year and sales remained consistent, but the stock kept falling. Richard P. Lowery, now an executive vice president at the firm, remembered meetings that seemed to focus not on the business, but on ways to improve the stock price.
As the stock languished, eventually deLaski and the board of directors decided that enough was enough. They began working on a plan for deLaski and his father to buy the company back.
That the family still owned a majority of Deltek’s shares — 55 percent — certainly helped the plan to privatize the company again.
When these kinds of deals are attempted, it’s almost always by companies that have large majority shareholders, often families. For example, earlier this month RWD Technologies Inc., a Baltimore-based technology services company, announced plans to privatize. That plan is being led by Robert W. Deutsch, RWD’s chief executive and holder of about 66 percent of the stock.
At Deltek, no outside shareholders held more than 5 percent of the stock when the deLaskis made their offer. The family bought the company back with $17 million in debt, $5 million of their own money and $28 million in cash held by Deltek. Afterward they’d own 93 percent of the stock. In sharp contrast to going public, when investment bankers clamored for the honor of doing the deal, doing the opposite was a far more lonely and difficult affair.
“Going private is completely swimming upstream,” deLaski said.
There was a lawsuit over the price offered by the deLaskis to Deltek shareholders, $7.15 per share in cash, which was about $4 less than what the company had gone public at five years earlier. The suit was eventually settled. Financial terms were not disclosed.
In the end, 4.1 percent of the shareholders voted against the offer. Two days later, on June 1, 2002, the deal was done.
Private Personality
Deltek’s Herndon headquarters exudes a sense of calm and order. Stepping off the fourth floor elevators, the first office you see is deLaski’s, which overlooks a grassy courtyard with a large pond and a fountain in the center. From some of the corner offices, you can look across Route 28 and watch planes land at Dulles International Airport.
DeLaski jogs more often now and spends less time in the office. Business remains good. As the owner of a private company, deLaski declined to disclose all of the company’s financials, but he said revenue remains around $100 million per year. And he said the company remains consistently profitable, with income between $5 million and $10 million, lower than what it made at its peak as a public company, but about the same as the firm’s last two public years.
DeLaski doesn’t regret having gone public, since it helped Deltek make a couple of acquisitions. But he certainly doesn’t miss those times.
Neither do Deltek employees, who say they no longer feel like their decisions are being second-guessed by the fits and starts of a volatile stock market. There is also relief over escaping a rash of reform legislation after the recent corporate scandals. Becker, the chief financial officer, relishes working away from the drumbeat of the quarterly financial report. She still does reports, but now they take a week to do instead of a month. And she gets to spend more time at home as well.
The good feelings might actually be a clue as to why Deltek probably shouldn’t have gone public in the first place. The personality of the traditional family-run business often has trouble meshing with the requirements of being a public company and public company executive. Kenneth deLaski is no exception.
One local executive familiar with Deltek remembers deLaski’s exasperation with having to constantly meet with analysts to explain Deltek’s business, an important job of public company managers.
And deLaski himself grew tired of the incredible amounts of time he had to spend communicating with shareholders and analysts and institutional investors.
In the end, some people familiar with the company believe that being public just wasn’t a very good fit.
“Just like individuals, companies have their own personalities,” said Austrian, the analyst. “Deltek seemed to be the quiet company. Private status may well be the best thing for them.”
