Orange County companies looking to go public didn’t find comfort in Wall Street’s mediocrity last year.
Many observers see a continued coolness in the county’s initial public offering market amid a modest economic and stock market gains forecast for 2006.
With just two local IPOs held last year, it was private equity firms and corporate buyers that stole the spotlight. Look for them to do the same this year.
“Smaller companies are getting bought rather than going public,” said Gordon McBean, director of asset management with Newport Beach-based Roth Capital Partners LLC. “The cost of being public today and the desirability of going public is less today, and probably hurts the quality of companies coming to the fore.”
Last year was marked by some of OC’s largest buyouts ever, including the announcement of UnitedHealth Group Inc.’s plan to buy Cypress-based PacifiCare Health Systems Inc. for $9 billion and Wachovia Corp.’s $3.9 billion acquisition of Irvine-based Westcorp and affiliate WFS Financial Inc. Deals included big corporate acquisitions and a string of buys by private equity investors.
Among other notable deals:
Irvine-based Mexican fast-food chain El Pollo Loco Inc. was bought by New York’s Trimaran Capital Partners LLC for an estimated $400 million.
Seal Beach-based Baker Tanks Inc. was bought for a reported $500 million or higher by New York-based Lightyear Capital LLC.
Los Angeles-based Leonard Green & Partners LP paid an estimated $200 million to $250 million for a majority stake in Irvine’s Claim Jumper Enterprises Inc. from owner and President Craig Nickoloff.
New York private equity firm Fenway Partners Inc. bought Anaheim-based Targus Group Inter-national Inc., a maker of accessories and devices for portable computers, for $383 million.
Germany’s Deutsche Bahn AG said it’s buying Irvine-based BAX Global Inc. for $1.1 billion. BAX parent Brinks Co. said it wanted to sell the overnight delivery services company in order to focus on security services.
Santa Ana’s GeoLogistics Corp., a global logistics company, nixed plans to go public. Instead, owner and turnaround investor Questor Management Co. of Detroit sold the company to Kuwait’s PWC Logistics for $454 million.
GeoLogistics wasn’t the only local company to set aside an IPO for a suitor in the past few years.
Two years ago, the Tustin-based Mimi’s Cafe chain cancelled plans to go public, saying it couldn’t refuse an $182 million buyout from Bob Evans Farms Inc., a Columbus, Ohio, country cooking-style restaurant chain.
Flush with cash, private equity firms have been active buyers.
“What’s happening is so many equity buyout funds are out there, and it’s so competitive with people chasing so few deals,” said George Wall, partner with Costa Mesa law firm Rutan & Tucker LLP.
The number of employees at buyout and venture capital firms has soared to more than 16,600 versus 8,700 a decade ago, according to Thomson Venture Economics.
Meanwhile, private companies are more hesitant to go public in the wake of the 2002 Sarbanes-Oxley Act, which put tougher audit requirements on publicly traded companies.
“A lot of people are a lot more reluctant to be a public company with all of the regulatory restrictions that come into play,” Wall said. “There’s such an inherent cost for anybody being public, regardless of size, that it’s something that is really quite prohibitive in a number of instances, especially for what you see in Orange County.”
No Help From Wall Street
Wall Street’s sluggish 2005 didn’t help spur more IPOs. The Dow Jones Industrial Average fell about 1% last year with Nasdaq up just 1.4% and the S & P; 500 index moving 3% higher.
Benefits of an improving economy were offset by interest rate increases, global instability and fallout from major hurricanes in the Gulf Coast region, according to market watchers.
Expect mediocre gains this year, said Grant Bettingen, president of Newport Beach-based stock brokerage Grant Bettingen Inc.
Bettingen expects the Dow to be flat, with the S & P; 500 index rising 2% to 3%. Nasdaq will outperform with a 5% to 8% gain, he said.
Bettingen said it’s easier to get bought by a private equity firm or do a reverse-merger to get a public listing than to hold an IPO.
There were 71 private equity deals worth more than $4 billion completed or announced in OC last year, according to Santa Monica-based FactSet Mergerstat LLC. OC saw 85 deals worth $3.8 billion in 2004.
Meanwhile, OC recorded 345 corporate buyouts valued at $25.4 billion through mid-October. The county saw 333 deals worth $13.8 billion a year earlier.
Quality counted for IPOs last year, said Francis Gaskins, president of market tracker IPODestktop.com LLP in Marina del Rey.
If a company wasn’t profitable, or “immediately profitable,” then its chances of a successful IPO were doubtful, Gaskins said.
Locally, Aliso Viejo-based Buy.com Inc. pulled its IPO plans late last year after lowering the offering price in a bid to attract interested investors (see related story, page 27).
Buy.com was unprofitable according to its latest regulatory filings. Sales were growing at a modest clip.
Costa Mesa apparel maker Volcom Inc. is profitable and posting big sales gains. It went public in a blockbuster IPO last year.
“It’s a tougher game now than in the 1990s,” Gaskins said. “There were no real benchmarks then. People tried to make them up and they weren’t based on results.”
