Internet entrepreneurs may have their public offerings planned before their Web sites are up and running. But growing numbers of executives at so-called old-economy companies would like to leave the stock market behind.
It's hard to blame them. In today's technology enamored market, a dollar of dot-com revenue is worth at least $10 to any business with its roots in a distribution channel other than the Internet. The recent turmoil in technology stocks notwithstanding, the valuation gap continues to widen. "We'd been frustrated for years with our stock price," says Mark Scott, corporate controller for Autocam Corp., a tier-two auto-parts supplier that was taken private by Aurora Capital Group in February. "We weren't getting the credit warranted from the public marketplace."
Neither was Seagate Technology Inc., a manufacturer of computer disk drives, which recently announced it would sell its disk-drive operations to Silver Lake Partners for $2 billion, and keep a 33 percent stake for management and employees. Scores of manufacturers, airlines, booksellers, chemical companies, banks, and insurance companies feel the same way.
"We've had an explosion of deal flow in old- economy companies," says William Price, a founding partner at buyout firm Texas Pacific Group. Like most private-equity outfits, Texas Pacific has recently been investing in telecom and technology-oriented manufacturers. But with the stocks of manufacturing and industrial enterprises trading at low single-digit multiples of cash flow, Price also sees opportunities in other sectors .
Private buyouts are being done with far less leverage than in the last decade. "Many deals in the late 1980s were done with 90 percent debt or more," says George David Smith, a professor of economics at New York University's Stern School of Business. "Now it's typically about 40 to 50 percent."
One reason is the debt markets are not much better than the equity markets for old-economy companies. Spreads on high-yield debt have narrowed since the credit crunch of 1998, but they remain wide. Auto- cam, for example, lowered its leverage from 50 percent to 40 percent of assets as a result of the buyout.