Ken Merritt, Managing Director of Merritt & Merritt & Moulton, recently shared his expertise on the current IPO environment in Vermont. Please read full Rutland Herald article below.
It could be a long wait for the next Vermont IPO
By Bruce Edwards
For a state the size of Vermont, the list of publicly traded companies was pretty impressive: Ben & Jerry’s, IDX, Banknorth Group, S-K-I Ltd, CVPS, Vermont Teddy Bear, Seventh Generation and a few more to boot. Today, those names have disappeared from the listings of the New York Stock Exchange, or NASDAQ – gobbled up by larger companies or in some cases taken private.
The number of Vermont-based publicly traded companies is down to a handful: Green Mountain Coffee Roasters, Union Bankshares, Casella Waste Systems and Merchants Bancshares.
So is there another Ben & Jerry’s or IDX on the horizon? There are successful and growing companies in the state, but business consultants and experts in private equity say another initial public stock offering, or IPO, isn’t around the corner.
And it’s not just Vermont where there has been a decline in the number of IPOs in recent years.
The number of companies going public has declined nationally from an average of 200 a year between 2004 and 2007 to 63 in 2009 in the aftermath of the global financial meltdown, according to H. Kenneth Merritt Jr., managing director of the Burlington law firm of Merritt & Merritt & Moulton. Over the last three years, he said, the number of IPOs has averaged 130 a year.
“So the overall volume nationally is down significantly from the highs of the mid-2000s,” said Merritt, whose firm advises growth companies. “But by far the biggest factor for that, and Vermont specifically, is the adoption of the Sarbanes-Oxley Act, which mandates a whole range of compliance activities by public corporations.”
Paying the price
In the aftermath of several corporate scandals, including Enron and Adelphia, where rampant fraud wiped out stockholders, Congress in 2002 passed the Sarbanes-Oxley Act.
In tightening regulations, Merritt said the law also “radically increased the cost of becoming a public company to the tune of millions of dollars,” primarily in accounting and also legal compliance.
He said Sarbanes-Oxley raised the financial bar for companies that want to go public.
When Green Mountain Coffee Roasters went public in 1993, Merritt said the company’s IPO raised $10 million.
“There are no $10 million IPOs anymore,” he said. “There are really at a minimum, $100 million is sort of the floor doing an IPO.”
Merritt said the other factor that makes going public challenging is the length of time a company needs to be in business before going public. Between 2003 and 2013, the average time was 16 years.
He also said given the state’s size, it’s “very difficult for a Vermont company to reach critical mass, prosper for 16 years, get to sufficient size that it would be an attractive public offering candidate, and go out and raise $100 million or more in the public market.”
Perhaps Vermont’s best known venture capital firm is FreshTracks Capital in Shelburne. FreshTracks has $25 million invested, much of that in Vermont companies, including NativeEnergy, Brighter Planet and Vermont Teddy Bear.
Cairn Cross, FreshTracks co-founder and managing director, said there’s no question that while Sarbanes-Oxley rightfully protects shareholders, it also makes the IPO route more difficult and more costly.
Cross said the question of liability may also discourage some companies from taking their company public.
“Going hand in hand with that, a lot of company managers and company boards of directors realize that if you don’t have a need for shareholder liquidity,” Cross said, “there’s maybe not a good reason to go public.”
Publicly traded companies have to adhere to strict financial reporting requirements and that can mean disclosing useful information to competitors.
“There is certainly some belief that all things being equal, you want to stay private as long as you can to kind of keep under the radar screen,” he said.
One of the areas of expertise for the Burlington certified public accounting firm of Gallagher, Flynn & Co. is business succession strategies for family-owned and closely held companies.
Greg Bourgea, managing partner at Gallagher, Flynn, said 10 years ago it was very common for a business client to have a long-term strategy of taking their company public.
But Bourgea said while there are a number of up and coming Ben & Jerry-type companies, he doesn’t hear that as a goal any longer.
“I would say we have as many or more of those types of companies, but I think the glamour of going public is not as prevalent,” he said.
Risk vs. reward
In addition to the financial and regulatory hurdles created by Sarbanes-Oxley, there are other considerations to going public as well.
Bourgea said companies have to weigh the risks versus the rewards. “I think there’s been a few high-profile IPOs nationally, not in Vermont, that didn’t go as well as anticipated,” he said, in an obvious reference to Facebook’s IPO, which disappointed.
Public companies also are forced to air their dirty laundry in public.
That happened to Green Mountain Coffee Roasters last year when its founder, Robert Stiller, dumped $125 million in stock to meet margin calls on some loans in violation of company policy. The stock sale occurred during a period when officials were barred from trading GMCR stock.
Given the cost and scrutiny of going public, companies do have other options to raise capital.
“If a company is successful and does get to a reasonable size, say $10 million, $20 million, $30 million in revenues, there’s certainly good alternative in terms of liquidity for the founders, selling to a larger company,” Merritt said, “and that’s the primary exit for Vermont companies to grow to a certain size, achieve profitability and exit through a sale to a large public company.”
A case in point: Merritt’s firm last year handled the sale of Ascension Technologies Corp. in Milton to Roper Industries, a multinational company. Ascension makes medical electromagnetic tracking devices.
Merritt acknowledged the down side to such a transaction is that control of the company ends up out of state or out of the country. But he also pointed out that very often the operations do remain in Vermont because a key component in the acquisition is the workforce.
Perhaps the best known example is Unilever’s acquisition of Ben & Jerry’s. The Anglo-Dutch company has given its Vermont subsidiary a certain degree of autonomy, including the ability to continue its social mission.
Cross said one high-growth company that could at some point take the IPO plunge is Dealer.com.
“I would look at any high-growth company that gets to a $100 million or more in sales,” he said. “I think that’s kind of the minimum threshold people are thinking of these days to go public.”
Cross also said that if enough employees are granted stock options in a company, those employees will want to cash out those options at some point and one way to do that is to take the company public.
MyWebGrocer, an e-commerce and e-marketing company, also caught Cross’s attention. Headquartered in the Champlain Mill in Winooski, the company provides digital services, including website design, to the grocery and consumer packaged goods industries.
When MyWebGrocer needed an infusion of cash to meet its growth plans, the company turned to The Stripes Group, a New York private equity firm.
According to the company’s website, “Although MyWebGrocer was a quickly growing, profitable company, MyWebGrocer was looking for a partner to help accelerate growth and bolster the company’s industry-leading position. MyWebGrocer chose to partner with Stripes Group in August 2009.”
Cross recalled that early on when Ben & Jerry’s needed to raise cash back in the 1980s to expand its business, Ben Cohen and Jerry Greenfield looked to Vermonters first. Under a little-used Securities and Exchange Commission rule known as 147, a company can offer stock to residents of the state where the company is headquartered. Cross said Rule 147 is less burdensome than what’s required for a full-blown stock offering.
“I’ve always wondered why nobody else has been interested in doing that,” Cross said. “I’ve heard of companies that have talked about doing it, although it’s always been kind of rumors, but I don’t know of anyone that has seriously, seriously gone down the path.”
For family-owned businesses in Vermont, going public isn’t usually an option. For those businesses, it’s a matter of selling or passing down the business to a family member.
“Many of these are family businesses, and with the job market as difficult as it is with younger people, we are seeing more of the next generation getting involved in their family businesses.”
Bourgea of Gallagher, Flynn said, “In the past, the lure of the Wall Street job was nice for kids coming out of college but right now those jobs are fewer and far between.”
If selling the family business or closely held company can’t be passed down to someone within their inner circle, Bourgea said there are other exit options: selling to another company or to a private equity fund.
He said there is a “ton of money out there” looking to buy businesses.
“The other strategy we see fairly often is the sale to an ESOP,” Bourgea said. “I think Vermont has probably higher than fair share of companies that have sold to an employee stock ownership plan.”
For an ESOP to be successful, the demographics have to work with the age of the workers spread evenly. He said an ESOP won’t work if too many of the employees are approaching retirement age and as result cash in their company stock.