Show them no quarter

Taking the long view, many private companies refuse to be held prisoner by Wall Street's shortsightedness.
By Dail Willis

It’s a long way from Wall Street in New York City to Lee Avenue in Sanford — MapQuest says 561 miles. That doesn’t stop some of the Street’s best and brightest investment bankers from making regular calls on the headquarters of Static Control Components.

“There isn’t a six-month period that goes by that we don’t hear from at least one,” CEO Ed Swartz says. “Different ones come. But you put them in a bag and shake them up, they all pretty much look the same. They’re fee-based hustlers, let’s face it. These guys think they’re the greatest salesmen in the world.”

But not even the siren song of America’s most ambitious financiers has swayed Swartz, 69, into taking his company public. Static Control has been privately held since he started it in 1986, and he plans to keep it that way. “A public corporation is a beast driven by quarter-to-quarter results. We can’t afford the luxury of trying to maximize results each quarter.”

Static Control is on track to generate $350 million in revenue this year. It’s No. 17 on the North Carolina 100, the annual ranking of private companies that Grant Thornton LLP compiles for Business North Carolina. The list is based on 2004 revenue, and participation is voluntary. “Distribution and manufacturing still dominate the list,” says Alan Day, the accounting firm’s partner in charge of the ranking.

Indeed, five of the 10 companies on the list that grossed $500 million or more last year were manufacturers: National Gypsum, Klaussner Furniture Industries, National Textiles, Parkdale Mills and Lord. The top 10 included two distributors: General Parts and Baker & Taylor; two restaurant chains: Golden Corral and Bojangles’ Holdings; and the world’s largest privately owned software developer: SAS Institute.

For some companies, an initial public offering can pay off debt, fuel growth or turn a founder’s sweat equity into cash. Pike Electric, No. 15, went public in July, but it’s on this year’s list because it was privately held on Dec. 31, 2004, the cutoff date. The $126 million it netted from its IPO will help the Mount Airy-based electrical contractor pay debt from an acquisition and a recapitalization.

In an economy with an appetite for corporate supersizing, why would any owner pass up the opportunity to dig deep into investors’ pockets? Reasons vary, but some CEOs of private companies have a fierce aversion to outside interference. Staying independent, they say, frees them to make decisions for long-term growth, the unspectacular and steady kind that brings true value to a business.

Privacy and control — the agility and freedom to make all business decisions — are often key factors, Day says, and companies think “hard and long” before inviting the public into the house. Listening to some CEOs of companies on the North Carolina 100, you might begin to wonder why any company would choose to go public.

National Gypsum, ranked fifth, has lived in both worlds. Once based in Dallas, the wallboard maker moved to Charlotte in 1993 after emerging from a bankruptcy reorganization that let it shed asbestos-related liabilities. It went public, and Delcor Inc. — the investment company owned by the family of C.D. Spangler Jr., the billionaire financier who was then president of the University of North Carolina — acquired 19 % of its shares. The investment led to a merger bid that turned into a takeover, which National Gypsum shareholders approved in September 1995.

“It was very complicated and not easy to do at all,” Chairman and CEO Tom Nelson says. “Going from a public company to a private one is time-consuming, often difficult and expensive.” Delcor decided National Gypsum could best realize its growth potential as a private company. Nothing has happened since to change that. “We’re fortunate to have a very solid, long-term group of investors that don’t have a need for liquidity,” says Nelson, who is Spangler’s son-in-law. Having the headquarters of Bank of America and Wachovia in Charlotte doesn’t hurt, he adds. “There’s a trillion dollars in capital sitting at Trade and Tryon streets.”

There can also be competitive advantages to staying private, and increased corporate scrutiny by the U.S. Securities and Exchange Commission and other regulators in recent years has sharpened that edge. “You don’t have to broadcast to the world what you’re doing,” says Tom Ogburn, director of the Winston-Salem-based Wake Forest MBA Family Business Center. “Many private or closely held companies are reluctant to talk about their finances, their structure, their ownership.”

If your competitors are public, the advantage gets even bigger. “As a private company, you’ve got clarity on how all your public competitors are performing, and yet the public competitors don’t have clarity on what you’re doing,” Nelson notes. He reads his competitors’ SEC filings regularly.

So does Dale Halton, at least for now. The CEO of Pepsi-Cola Bottling Company of Charlotte earlier this year agreed to sell her business, ranked 59th on the list, to Somers, N.Y.-based Pepsi Bottling Group. Terms of the deal were not disclosed. The publicly traded buyer is the world’s largest manufacturer, seller and distributor of Pepsi. Halton has run her company for nearly 25 years. At least once a year, she studies the SEC filings of Coca-Cola Bottling Company Consolidated, a much larger competitor also based in Charlotte. “It gives you a really good idea of how you’re doing and where your place is in the market.”

Halton, Swartz and Nelson agree that they find it easier to run their businesses without the constraints of quarterly reporting and restrictions imposed on public companies, “Being privately held, we could do things our way,” Halton says. For some companies, such freedom may be more than just a comfort zone.

Swartz says his business depends on being able to invest in growth that might not be profitable for years. He started it to make packaging to protect electronic parts 11 years after selling his recycling and smelting company. Before long, it was making the instruments as well as the packaging. Then came a third specialty: making parts for companies that remanufacture laser-printer toner cartridges. “About seven or eight years ago, the tail started wagging the dog.” Making cartridge parts is now the biggest part of the business.

Static Control introduces 500 to 800 parts each year, spending money that probably won’t generate positive returns for three or four years, he says. “If I started running a public corporation, all the analysts want to know is, ‘What are you going to make next quarter?’ I really don’t want this to be a company that’s driven by having a report card every three months.”

Companies that do go public, Ogburn says, often are surprised by the reporting requirements and the Street’s expectations. “Unfortunately, our system of public ownership is geared toward short-term assessments of a company’s performance. I think that puts a lot of companies in some pretty severe positions.”

Some companies compound the error by taking on faulty projects or using dodgy accounting techniques that hurt the business. “Too many companies feel that short-term pressure to do stupid things to jack up this quarter’s earnings,” Swartz says. One example: David Hurley, former chief operating officer of Wilmington-based aaiPharma, pleaded guilty in June to fraud and financial misrepresentation in connection with a scheme that counted products still in the distribution channel as revenue.

Businesses with cyclical or seasonal earnings can find it especially difficult to meet expectations every quarter. But there’s more to the burden of public ownership than the wrath of Wall Street analysts who dislike what they call “lumpy” earnings. Since 2002, the Sarbanes-Oxley Act has increased reporting requirements. “I know some of the strain it puts on companies,” says National Gypsum’s Nelson, who sits on the boards of several public companies. “Sarbanes-Oxley compliance has added a significant burden and an ongoing cost.”

If a company is struggling or trying to modify its business model, being private can make fixing things much simpler. “Trying to change businesses or do turnarounds — it’s not something you can do in a quarter,” Nelson says. “It may take a few years, and sometimes it’s easier to remove yourself from that public microscope and be able to do that without having thousands of people looking in and commenting on the short-term impact.”

Pride, not just profits, can be a factor in staying private, especially for family businesses, which often have a streak of independence and clannishness encoded in the corporate DNA. “It really kind of depends on what your long-term objectives for the company are,” Ogburn says. “Do the original owners — the founders, the family — want to see this company continue generation to generation? Or are they trying to develop wealth, and the future of the company, whether it’s in their hands or somebody else’s hands, is a secondary consideration?”

At Static Control, the generational tilt is clear. Swartz does not want his company to be sold or to go public — ever. His shares, which constitute a majority, will be put into a trust controlled by his two sons, who work in the business, and two other managers.

Halton sold her company, she says, because she thought the time and price were right. She will not elaborate beyond that, except to say that she had known for 35 years that she would sell someday. “There were absolutely no pressures to go public,” she says. Nor did she feel pressured to sell now. “I wasn’t sure I was going to sell until the bids came in. If they hadn’t been good enough, we were going to keep putzing along.”

Still, she acknowledges, it’s hard to give up something with such a strong family history. Her company is one of two original Pepsi franchises in the United States. It was started in 1905 by grandparents Henry and Sadie Fowler a few years after a New Bern pharmacist created the soft drink. “I’m my grandparents’ only grandchild. There are times when the decision sits very heavy on my shoulders. But it was time.”

Below is a partial breakdown of North Carolina's Top 100 private companies.

North Carolina's TOP 100 Private Companies
$500 Million or More in 2004 Revenue
2005
Rank
2004
Rank
Company
Headquarters CEO
Employees
Business
1
1
General Parts Inc. Raleigh O.Temple Sloan Jr. 14,000 Auto-parts distributor
2
2
SAS Institute Cary James Goodnight 9,500 Software Developer
3
Baker & Taylor Inc. Charlotte Richard Willis 2,750 Distributor of books, DVDs and other media
4
3
Golden Corral Corp. Raleigh Theodore M. Fowler 6,100 Developer and operator of restaurants
5
5 National Gypsum Co.

Charlotte

Tom Nelson 2,700 Maker of wallboard products
6
4
Klaussner Furniture Industries Asheboro J.B. Davis 7,200 Maker of home and commercial furnishings
7
7
National Textiles LLC Winston-Salem Jerry D. Rowland 3,411 Maker of fleece and other knitted fabrics
8
6
Parkdale Mills Inc. Gastonia Anderson Warlick 3,089 Yarn maker
8
Lord Corp. Cary Richard L. McNeel 2,500 Maker of adhesives, sealants and noise controls
8
Bojangles' Holdings Inc. Charlotte Joe Drury 4,000 Operator of fast-food restaurants

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