IPO WISH LIST
Some May Never Happen, But OC Counts Several Big Candidates
By RAJIV VYAS
If you’re an investment banker dreaming about Orange County’s next big initial public offering, who would you like to see knocking at your door?
There’s no shortage of venture-backed technology hopefuls here just waiting for the market for public offerings to turn. But what about some of the county’s more established private companies, or potential spinoffs from public companies?
The Business Journal talked to local investment banking players to come up with a wish list of companies that could be public offering candidates given the right circumstances. Our wish list is just that,many of the names we came up have no plans to go public now and may never. Still, our list wouldn’t be complete without them.
The county has a number of companies that are bonafide public offering material, according to OC investment bankers and corporate lawyers. Their picks are through casual observations, hearsay and intelligent guesses.
Many of these companies are older, privately held businesses. Some are venture-backed companies whose investors, sooner or later, are going to be looking for a way to cash out.
There are at least 10 local diamond-in-the-rough public offering candidates, according to those contacted by the Business Journal. Some could go out in the next year or so, while others could take two to three years, if ever. A few of these companies will shun the public markets entirely and simply choose to keep running their businesses privately. Or they could acquired by larger companies.
“There are lots of companies out there that have traditional lines of businesses and strong balance sheets,companies that aren’t going to be tainted by the accounting concerns out there,” said Tom Brockington, partner in the corporate department of Costa Mesa-based law firm Rutan & Tucker LLP.
One company,Liquidmetal Technol-ogies Inc., with its headquarters in Tampa Bay and main operations in Lake Forest,raised $75 million in an offering last week.
Here’s the wish list of public offering candidates:
Pacific Life Insurance Co.
Taking Newport Beach-based life insurer and financial services company Pacific Life public would be one deal that investment bankers would knock each other over to get in on.
“Pacific Life certainly has the marketing exposure to go public and my sense is that they would be a logical candidate if they desire to do so,” said Fred Jager, chief executive of Newport Beach-based Hunter Wise Financial Group LLC.
“Pacific Life is clearly a candidate,” agreed Christopher Halloran, a managing director at Irvine-based investment bank L.H. Friend, Weinress, Frankson & Presson LLC.
Pacific Life’s size and profitability make it attractive for a public offering, Halloran said.
Since its founding in 1868, Pacific Life has grown to be the largest private company in OC. The company had $3.6 billion in revenue in 2001 and manages about $360 billion in assets. Pacific Life counts about 2,700 workers in OC and more than 3,700 overall.
Pacific Life threw aside a roadblock to a possible public offering when it changed its corporate structure in 1997. The company was owned up to that point by its policyholders, which, according to regulations covering insurance companies, prevented it from issuing shares to the public.
But five years ago the insurer converted to a mutual holding company structure, splitting the company into three tiers: ultimate parent Pacific Mutual Holding Co., which is owned by the policyholders, Pacific LifeCorp. and Pacific Life. Pacific LifeCorp, the parent company of Pacific Life, can issue up to 49% of its voting stock to outside investors in a public offering.
“Through this innovative mechanism, our family of companies now has access to capital markets,” the company says on its Web site.
Wahoo’s Fish Taco
That Santa Ana-based taco chain is one of Halloran’s favorite picks, in part because he often eats at Wahoo’s.
“They are always packed, their food is great and they seem to be expanding pretty dramatically,” he said.
Wahoo’s first opened in 1988 and counts 24 restaurants, according to the company’s Web site.
And Wahoo’s has plans for at least three more stores in the near term: in Fullerton, Encinitas, and Longmont, Colo. Banking sources said they expect further growth.
“With 24 stores they are too small to go public, but they are an interesting concept and sometimes concept deals make sense,” Jager said. “The real question is: do they have the appetite for moving forward?”
The chain was founded by brothers Wing Lam, Ed Lee and Mingo Lee, Brazilian immigrants of Chinese descent. Wahoo’s began with a loyal following of surfers, skateboarders and snowboarders.
The trio’s parents, Cheong Lee and So-Ching Lee, gave their sons their first loan for $60,000 in 1988.
The company is on the radar screen of big investment banks. Merrill Lynch & Co., which loaned the brothers $2.3 million a few years ago for their expansion, featured Wahoo’s in a flashy TV commercial created by Merrill’s New York-based ad shop, J. Walter Thompson Co.
Wahoo’s competed against more than 400 Merrill Lynch small-business clients to win one of six advertising spots. They got help from Dominic Alvarez, a broker for the Newport Beach offices of Merrill Lynch.
In-N-Out Burgers
L.H. Friend’s Halloran also likes Irvine-based In-N-Out Burgers, known for its burgers and fresh-cut french fries.
“This company would undoubtedly be on the top of my list,” Halloran said.
In-N-Out counts more than 140 eateries and estimated sales in the range of $100 million to $150 million. The fast-food chain was founded in Baldwin Park in 1948 by Harry and Esther Snyder and has been tightly held ever since.
A public offering for In-N-Out still is unlikely, though the thought isn’t as outlandish as it once was.
A series of tragic accidents wiped away any clear line of succession at the company. In 1999, In-N-Out’s then-chief executive H. Guy Snyder died from a painkiller overdose. His father, Harry, died of cancer in 1976.
Upon Harry’s death, son Richard “Richie” Snyder took over as president but died in a 1993 corporate jet crash near John Wayne Airport.
Now matriarch Esther Snyder, who’s in her 80s, is heading up a management team that includes Guy Snyder’s son-in-law Mark Taylor, who serves as general manager of operations.
Chapin Medical Co.
Just across the OC border in Corona is Chapin Medical, another of Jager’s favorites. The distributor of drugs and other healthcare products has plans to triple its staff of about 35 workers and launch a new product line. It’s building a new headquarters ahead of its expansion.
“Of all the candidates, Pacific Life and Chapin would be the most logical,” he said.
Chapin is headed by OC entrepreneur and philanthropist Mark Chapin Johnson.
“Chapin is an extremely well-known company in the industry,” Jager said. “To the best of my knowledge, they have never borrowed a penny since inception. They may be at a point now where they need to think about expanding their business and either take on some debt or go to the public.”
Since borrowing hasn’t been used in the past, Jager speculates “if they plan to expand then one could argue that they would have to do it through an equity offering rather than debt.”
Freedom Communications Inc.
Irvine-based Freedom owns OC’s largest newspaper, the Orange County Register. With rumblings about pending management shifts at the company, Freedom is a regular topic of conversation among bankers.
Besides the Register, Freedom has 28 other daily newspapers, eight TV stations and 20 magazines. Freedom was founded by R.C. Hoiles 65 years ago, and has been guided by five generations of Hoileses ever since.
“They have the critical mass, diversity of business model from newspaper to TV and magazines,” said Charles Ruck, head of law firm Latham & Watkins’ Costa Mesa mergers and acquisitions practice.
Fiercely protective of its libertarian origins, Freedom Communications hasn’t gone to the public markets in the past.
But size does matter in today’s media sector. There are only a handful of companies which have managed to remain private, while big publicly traded media companies such as the Washington Post Co. only get bigger. Publicly raised funds could help Freedom grow or improve its capital equipment.
“There is also probably a need for liquidity with the generational transfer,” Ruck said.
Kingston Technology Co.
Fountain Valley-based memory products maker Kingston is known for its generosity to workers. Founded by David Sun and John Tu, Kingston operated as a unit of Japan’s Softbank Corp. for three years until 1999, when the founders bought back the company they created.
Kingston’s founders show no outward signs that they’re even thinking of an offering. But Halloran said he could see Kingston’s founders looking at a public offering as a way of rewarding employees.
By giving some equity stake to their employees and then taking the company public, Kingston workers could benefit tremendously, he said.
Raj Manufacturing Inc.
One of Jager’s “toss up” picks is Tustin-based Raj Manufacturing, one of the nation’s largest swimwear companies with nearly 400 employees. Raj designs and makes swimwear under the brands Athena Collection, Athena Pick Your Fit, Rajman, Guess? and Guess? Girls.
But even after 35 years in business, Raj is not an investment banker’s dream offering.
“The fact that they are a contract manufacturer as opposed to a retail manufacturer where they don’t have their own line of stores would probably hold them back,” Jager said.
The Irvine Company
Yes, The Irvine Co.’s name comes up in conversation, but it is deep down most observers’ lists of potential public offerings.
A real estate owner and developer, the Irvine Co. is one of the biggest and financially strongest,it has virtually no debt,companies in the county. With huge land holdings in Irvine and other areas, the Irvine Co. could indeed be the blockbuster offering that bankers are looking for.
“Absolutely, they could, the question is: would they want to,” said Latham & Watkins’ Ruck. “They are so big and so powerful that they don’t need to take additional cash.”
And chairman and sole owner Donald Bren has expressed no interest in taking this giant real estate company public. Irvine Apartment Communities, the company’s apartment unit, once was a publicly traded company but was taken private a few years ago when Bren bought it back.
Ruck, who worked on taking Irvine Apartment Communities public, said that the Irvine Co. could borrow at a cheaper interest rate than the most public companies. Accessing the debt market, he said, would be more cost effective than the public equity markets.
“When we took Irvine Apartment Communities public, they did it because all of a sudden cash was cheaper in the public market,” he said. That situation no longer exists, he said.
Rutan’s Brockington: “My guess would be that the Irvine Co. would be the least likely just because of Donald Bren. He runs it the way he wants to run it. He has access to fair amount of capital from lots of different sources. Why should he subject himself to the scrutiny of being a public company when he can pretty much do what he wants right now?”
Still, Bren always could reevaluate his options if market conditions change, for estate planning reasons or a transfer of wealth.
Iteris Inc.
Anaheim-based Iteris, a unit of Joel Slutzky’s incubator Odetics Inc., is one of OC’s technology public offering candidates.
Iteris went to the equity market in 2001 when it sold preferred stock to two institutional investors. Odetics had been hoping to sell shares of Iteris in a public offering a few months earlier in March, but postponed the public offering when the market for new shares tanked.
Iteris designs and installs software-based systems that aim to improve transportation safety and efficiency. Halloran did not give numbers but said that the company has shown continued improvement in revenue growth and profitability, something that is a must for a company that still hopes to have a public offering.
Go2Systems Inc.
This Irvine-based database company is another technology business that Halloran thinks has potential. Go2Systems’ products allow businesses to edit, update and communicate data on a real time basis to customers that are seeking information about local businesses. Halloran said that through partnerships with big names such as McDonald’s Corp., Burger King Corp. and Cendant Corp.’s Ramada, the company is growing and has carved out a niche for itself.
Masimo Corp.
The Irvine-based medical device maker is a Ruck candidate.
“Masimo is a well-heeled, venture-backed company that has executed its business plan very well,” Ruck said. “They have licensed their technology to most of the major manufacturers and so are not a good candidate for acquisition (by one of those candidates).”
Ruck added that the company has investment banking support from Deutsche Bank AG.
InSight Health Services Corp.
The Newport Beach-based medical imaging company has had a back-and-forth private, public history. InSight was a publicly traded company until October when management took it private in a deal financed by J.W. Childs Associates LP of Boston and Washington, D.C.-based The Halifax Group LLC. This was the second time that InSight has been taken private,bankers say it will be a couple of years before the company comes out with another public offering.
Quantum Technologies Worldwide Inc.
The Irvine-based systems integrator for fuel cell engine makers is a unit of publicly traded Impco Technologies Inc. of Cerritos.
“Quantum is a hot commodity, with impressive technology in fuel cells,” Ruck said. “They should experience heavy demand as California pushes the Big Three to produce electric and hybrid vehicles and Wall Street should appreciate that.”
Ruck said that Quantum is in the process of spinning out from Impco.
Looking Ahead
Although OC has many solid private companies that could go public, bankers say it’s not the right time for most.
There were just 110 initial public offerings in the U.S. last year, compared to 353 in 2001. And only 13 companies went public in the first quarter,none in OC.
Ribapharm Inc., a spinoff from Costa Mesa-based ICN Pharmaceuticals Inc., went public in April.
“Unless you’re a company with the recognition that Pacific Life has, there are 10 reasons why you shouldn’t go public,” these days, Jager said.
Not only is it difficult to raise money right now, but getting analyst coverage and fund manager following is difficult, Jager said.
Latham’s Ruck agreed that the capital markets aren’t receptive to public offerings.
“We talk about an IPO window and that IPO window is closed, except for the most seasoned companies,” he said. “Even if that window was open, valuations are generally depressed.”
