Pros and cons of taking control of a public company

[shalab]

Wanted to run this by the board - after the looking at the recent turn by Gad in taking over PGNT and SEDN.

 

Advantages:

    - Can get cash flows from the business

    - Improves the ability of the person gaining control to get a permanent job ( and salary )

    - If moneys are allocated properly, there is value to the remaining shareholders as well.

 

Disadvantages:

 

  - This is from Buffett, he has said that buying Berkshire was a mistake

  - the below average business required a lot more cash to keep going and potentially decreased Buffett investment returns by a few points.

 

 

 

 

[DoddDisciple]

If you actually enjoy the whole process, then take over a public company. However, if you're using your own money to do so, I'd say you're pretty well off already. Why subject yourself to more work and oversight for money that won't create all that much more benefit to you personally? Like per each additional dollar, how much enjoyment will you accrue?

 

If I had $5M, close to PGNT's market cap, I'd divvy it up between multiple companies or investment options that require less work. My life wouldn't change that much to $10M, so why be in a rush to get there, and not needing to take money out for anything means you can go long on a lot of eclectic investments without worry.

[Parsad]

You guys are missing the biggest, and by far the most important point...access to permanent capital and financial markets.  While the downside is more regulatory hurdles, filing/legal/listing costs, and greater scrutiny of daily share valuation.  The upside is complete freedom from partner/shareholder redemptions, as well as the ability to quickly raise more capital through public markets. 

 

Although, if your private corporation generates more than enough cash flow for future needs, and you will not need access to capital markets, than simply going the private company route is better than public.  Cheers!

[oddballstocks]

You guys are missing the biggest, and by far the most important point...access to permanent capital and financial markets.  While the downside is more regulatory hurdles, filing/legal/listing costs, and greater scrutiny of daily share valuation.  The upside is complete freedom from partner/shareholder redemptions, as well as the ability to quickly raise more capital through public markets. 

 

Although, if your private corporation generates more than enough cash flow for future needs, and you will not need access to capital markets, than simply going the private company route is better than public.  Cheers!

 

With your track record do you really have problems with partners trying to pull their capital at inopportune times?  Have you ever considered going the CEF route?  You can raise capital much easier, and you don't have to deal with those pesky partners anymore either, they become nameless shareholders.  The ongoing fees are much smaller than an open ended mutual fund, and you essentially have the permanent capital you desire.

[oddballstocks]

If you actually enjoy the whole process, then take over a public company. However, if you're using your own money to do so, I'd say you're pretty well off already. Why subject yourself to more work and oversight for money that won't create all that much more benefit to you personally? Like per each additional dollar, how much enjoyment will you accrue?

 

If I had $5M, close to PGNT's market cap, I'd divvy it up between multiple companies or investment options that require less work. My life wouldn't change that much to $10M, so why be in a rush to get there, and not needing to take money out for anything means you can go long on a lot of eclectic investments without worry.

 

I have often thought this same thing as well.  If I had the capital to buy a small public company why would I want to put myself through that hassle instead of just investing the capital and relaxing?  The truth is no one buying these companies is using their own money, they're using someone else's money which is why this suddenly becomes attractive. 

 

You get to buy a public company with someone else's money, then earn fees on that money and get paid a salary.  You can then use your earnings to buy out your partners and consolidate your ownership.  From there you start to buy other companies, build an empire, justify a high salary and hit the links.  This is truly the ultimate game plan for how to get rich if you have no capital to start with, use someone else's money.  The brilliance of this is you don't even need to be a good investor, just good at raising the initial capital.  Once the initial capital is raised and a company is purchased there are all sorts of tools the manager can take to ensure they will never be kicked out by shareholders (how about reincorporate in Indiana or Ohio...).

 

The problem with this is I don't see many tiny companies issuing capital at attractive rates who aren't using scummy brokers to sell the offering.  There isn't exactly a thriving secondary market for companies in the $5-15m range.  Heck, most of these companies are trying to flee the markets quickly.

 

I have kicked around this idea for maybe the past year and a half with a friend.  We found a company trading at an insane valuation, where if the CEO were kicked out this plan could work.  The problem is the CEO's golden parachute payout sucked up a lot of the margin of safety in the investment.  It's potentially still attractive, I even recently had someone offer to front the cash for the entire deal.  The problem is the outcome is binary, if it goes well it goes really well for everyone involved.  If it doesn't succeed, and there are a million reasons why it wouldn't, I would probably end up broke and in lawsuit hell.  The company is dark and the only way to get financials is to hold registered shares, mine are sitting on the desk right next to me, constantly reminding me of the potential..

[DoddDisciple]

Also, who really won in the Berkshire buyout story? I'm sure Stanton didn't have much worse of a life after getting outed, but for someone like Buffett, I'm sure they kept looking at the billions and billions lost by getting locked in the firm. Hopefully the 1/8 of a dollar difference was worth it though.

[Parsad]

You guys are missing the biggest, and by far the most important point...access to permanent capital and financial markets.  While the downside is more regulatory hurdles, filing/legal/listing costs, and greater scrutiny of daily share valuation.  The upside is complete freedom from partner/shareholder redemptions, as well as the ability to quickly raise more capital through public markets. 

 

Although, if your private corporation generates more than enough cash flow for future needs, and you will not need access to capital markets, than simply going the private company route is better than public.  Cheers!

 

With your track record do you really have problems with partners trying to pull their capital at inopportune times?  Have you ever considered going the CEF route?  You can raise capital much easier, and you don't have to deal with those pesky partners anymore either, they become nameless shareholders.  The ongoing fees are much smaller than an open ended mutual fund, and you essentially have the permanent capital you desire.

 

Yes, but you no longer provide liquidity for your share/unit holders.  If you acquire public or private businesses with overpriced shares, those owners may want to liquidate part of their sales proceeds to pay taxes, distribute capital amongst their own shareholders/heirs, or invest somewhere completely different.  With a CEF, doing that may prove difficult in a relatively short period of time if it is a significant percentage of outstanding shares, and thus turn away a considerable subsection of the companies you may be targeting.  Cheers! 

[Parsad]

If you actually enjoy the whole process, then take over a public company. However, if you're using your own money to do so, I'd say you're pretty well off already. Why subject yourself to more work and oversight for money that won't create all that much more benefit to you personally? Like per each additional dollar, how much enjoyment will you accrue?

 

If I had $5M, close to PGNT's market cap, I'd divvy it up between multiple companies or investment options that require less work. My life wouldn't change that much to $10M, so why be in a rush to get there, and not needing to take money out for anything means you can go long on a lot of eclectic investments without worry.

 

I have often thought this same thing as well.  If I had the capital to buy a small public company why would I want to put myself through that hassle instead of just investing the capital and relaxing?  The truth is no one buying these companies is using their own money, they're using someone else's money which is why this suddenly becomes attractive. 

 

You get to buy a public company with someone else's money, then earn fees on that money and get paid a salary.  You can then use your earnings to buy out your partners and consolidate your ownership.  From there you start to buy other companies, build an empire, justify a high salary and hit the links.  This is truly the ultimate game plan for how to get rich if you have no capital to start with, use someone else's money.  The brilliance of this is you don't even need to be a good investor, just good at raising the initial capital.  Once the initial capital is raised and a company is purchased there are all sorts of tools the manager can take to ensure they will never be kicked out by shareholders (how about reincorporate in Indiana or Ohio...).

 

The problem with this is I don't see many tiny companies issuing capital at attractive rates who aren't using scummy brokers to sell the offering.  There isn't exactly a thriving secondary market for companies in the $5-15m range.  Heck, most of these companies are trying to flee the markets quickly.

 

I have kicked around this idea for maybe the past year and a half with a friend.  We found a company trading at an insane valuation, where if the CEO were kicked out this plan could work.  The problem is the CEO's golden parachute payout sucked up a lot of the margin of safety in the investment.  It's potentially still attractive, I even recently had someone offer to front the cash for the entire deal.  The problem is the outcome is binary, if it goes well it goes really well for everyone involved.  If it doesn't succeed, and there are a million reasons why it wouldn't, I would probably end up broke and in lawsuit hell.  The company is dark and the only way to get financials is to hold registered shares, mine are sitting on the desk right next to me, constantly reminding me of the potential..

 

It's always other people's money, unless you are some rich trust fund brat or inherited a significant amount of wealth...this accounts for about 50% of money managers by the way!  ;D

 

I have no problem with people using other people's money to generate wealth both for those people and themselves.  The question, and this may simply be semantics, is how fair is the compensation structure and is it in alignment with the long-term interests of shareholders, especially in terms of the risks and amount of work the CEO will be undertaking.

 

I was ok with Biglari getting $900K a year.  I was ok with Biglari even having an incentive fee structure if it was something like a 8-10% hurdle, and 10-15% incentive fee.  I was even ok with Biglari having both a salary and a reasonable incentive fee.  I was not ok with Biglari having an incentive fee identical to a hedge fund, since there were enormous structural advantages of captive capital.  Where people's opinions lie on these matters will vary across the spectrum.  But almost everyone will have a point where things become excessive...be it in partnership form or a public corporation!  Cheers!

[SharperDingaan]

The underlying assumption is that you are going to grow the coy at something above its organic growth rate; that's why you need the access to public markets. Your competitors also have to not react to the threat your growing size poses to them.

 

If you want the empire, you really need to be the CFO of someone else; & with most of your stake in vesting options. If it fails to perform during your term (average 2-3 years) you walk away rich from the parachute, & with your wealth intact; if it works, great for you. As you have independent wealth you would also hedge your position, so no matter what - you are going to come out ahead. Question is: do you really need the stress that goes with it, & is this not really an ego thing.

 

Small is not just beautiful (no reg filings or external audits required), it is also a lot easier (& more fun) to actually run; & if its any good - it is not hard to find a larger entity willing to buy out all the owners simultaneously. Financing reflects the quality of the proposal, & as CFO you control it. Equity raises also do not have to be via market issue - pre-selling goods, crowd funding, or private placement are all common practice.

 

In the brewing business; most kraft breweries, & good distribution outlets (1,000,000 beers/yr), are private.

That should tell you something.

 

Good luck.

SD

 

 

 

[oddballstocks]

If you actually enjoy the whole process, then take over a public company. However, if you're using your own money to do so, I'd say you're pretty well off already. Why subject yourself to more work and oversight for money that won't create all that much more benefit to you personally? Like per each additional dollar, how much enjoyment will you accrue?

 

If I had $5M, close to PGNT's market cap, I'd divvy it up between multiple companies or investment options that require less work. My life wouldn't change that much to $10M, so why be in a rush to get there, and not needing to take money out for anything means you can go long on a lot of eclectic investments without worry.

 

I have often thought this same thing as well.  If I had the capital to buy a small public company why would I want to put myself through that hassle instead of just investing the capital and relaxing?  The truth is no one buying these companies is using their own money, they're using someone else's money which is why this suddenly becomes attractive. 

 

You get to buy a public company with someone else's money, then earn fees on that money and get paid a salary.  You can then use your earnings to buy out your partners and consolidate your ownership.  From there you start to buy other companies, build an empire, justify a high salary and hit the links.  This is truly the ultimate game plan for how to get rich if you have no capital to start with, use someone else's money.  The brilliance of this is you don't even need to be a good investor, just good at raising the initial capital.  Once the initial capital is raised and a company is purchased there are all sorts of tools the manager can take to ensure they will never be kicked out by shareholders (how about reincorporate in Indiana or Ohio...).

 

The problem with this is I don't see many tiny companies issuing capital at attractive rates who aren't using scummy brokers to sell the offering.  There isn't exactly a thriving secondary market for companies in the $5-15m range.  Heck, most of these companies are trying to flee the markets quickly.

 

I have kicked around this idea for maybe the past year and a half with a friend.  We found a company trading at an insane valuation, where if the CEO were kicked out this plan could work.  The problem is the CEO's golden parachute payout sucked up a lot of the margin of safety in the investment.  It's potentially still attractive, I even recently had someone offer to front the cash for the entire deal.  The problem is the outcome is binary, if it goes well it goes really well for everyone involved.  If it doesn't succeed, and there are a million reasons why it wouldn't, I would probably end up broke and in lawsuit hell.  The company is dark and the only way to get financials is to hold registered shares, mine are sitting on the desk right next to me, constantly reminding me of the potential..

 

It's always other people's money, unless you are some rich trust fund brat or inherited a significant amount of wealth...this accounts for about 50% of money managers by the way!  ;D

 

I have no problem with people using other people's money to generate wealth both for those people and themselves.  The question, and this may simply be semantics, is how fair is the compensation structure and is it in alignment with the long-term interests of shareholders, especially in terms of the risks and amount of work the CEO will be undertaking.

 

I was ok with Biglari getting $900K a year.  I was ok with Biglari even having an incentive fee structure if it was something like a 8-10% hurdle, and 10-15% incentive fee.  I was even ok with Biglari having both a salary and a reasonable incentive fee.  I was not ok with Biglari having an incentive fee identical to a hedge fund, since there were enormous structural advantages of captive capital.  Where people's opinions lie on these matters will vary across the spectrum.  But almost everyone will have a point where things become excessive...be it in partnership form or a public corporation!  Cheers!

 

I agree, the trick is finding a way that both shareholders and management can both benefit.  The problem with a public company is you might have fantastic results but the share price is unmoved.  The work you did would earn you an outsized salary but shareholders would have nothing, unless you return the gains as a dividend.

 

SharperDingaan is onto something with private companies.  I really think the sweet spot is running an unlisted company that files on OTCMarkets.  You don't have to worry about the SEC or filing fees, yet you do get a market multiple assigned to your shares which is important.

 

The only other thought I have is that running an operating business is far more time consuming than just investing.  There are so many things that require attention.  I know Buffett has this hands off approach, but I'm not sure how common that is.  Many owners who are looking to cash out don't want to run the business anymore.  Or the ones that do want too high of a price.

[ScottHall]

I've thought a lot about this myself, and I think the trouble I've had with convincing myself this is worthwhile is that even if a person was successful in the takeover, the stake could represent the vast majority of their personal wealth. And that's troubling, because if the books are cooked, or you get in there and find out you have no clue what you're doing, or you're at the top of a cycle, or... you could end up losing money you need for the sake of a chance at money you don't.

 

Whereas with passive investments, it's easier to sit back and get "good enough" returns with no where near the same risk profile.

[TeddyLampert]

This topic hasn't been discussed since January, but I wanted to ask a relevant question:

 

If you manage a small fund of <$100 mm, how do you take control of a public company listed in the US?

 

I was looking at the history of Blue Chip Stamps, and it seems that Buffett was acquiring unlisted shares of BCS mostly through the BRK vehicle. In other words, it was a public company acquiring another public company; that makes sense. But are there important differences or considerations if it is done through a fund vehicle?

[merkhet]

^ Well, you get paid twice if you're doing it through a fund vehicle. So that's one important difference.

 

I agree largely with ScottHall & Parsad on this one. It's a great idea because of the possibility of permanent capital and a steady influx of additional capital to allocate, but you have to be damn sure that everything you think is there is there.

[SharperDingaan]

You might want to remind yourself that a public coy does not have to sell equity to raise capital- it can also swap debt for equity. Buying OTM calls & distressed debt at cents, tripping a covenant, & forcing extreme dilution through a debt/equity swap; is a time-honored technique, & almost always immediately followed by a privatization (hedged via the OTM calls).

 

A real underlying business, suddenly relieved of the bulk of an excessive interest burden, is a very valuable thing - & most are not about to share, or report to the world about it. The additional advantage is ability to preplan tax ahead of an IPO exit strategy, & increase your final payout into the 7-8 zero range within 5-10 yrs of initiation.

 

Always get paid, & paid well; for whatever you do.

 

SD

 

 

 

[TeddyLampert]

Thanks for all the replies  ;D

 

Still wondering about the following question:

 

If you manage a small fund of <$100 mm, how do you take control of a public company listed in the US?

 

Thanks!

[frugalchief]

 

If you manage a small fund of <$100 mm, how do you take control of a public company listed in the US?

 

 

Hey Teddy

 

I would reference Sardar Biglari (running Biglari Holdings and his private investment partnership, Lion Fund, LP) or Ryan Morris of Meson Capital.

 

Biglari through TLF (the Lion Fund) bought i think around 32% of the shares on a small restaurant chain, Western Sizzlin back in the mid-2000s.  He nominated himself to the board, got it, then became CEO after forcing(?) the other members off.  He wanted to create value and turn the business around.  It's a guess, but TLF only had probably $25mm or so in AUM around that time.

 

Biglari also used Western and TLF to buy shares in Steak n Shake (a much larger company at the time than TLF and Western put together), do the same nomination, got it, then became CEO again.  (He only owned about 15% of the shares when all this occurred...but shareholders voted him and Phil Cooley in).  Subsequently restructured SNS and renamed it Biglari Holdings.  That's a pure play of taking control of a public company.

 

Ryan Morris hasn't necessary "taken control" of companies, but he is on the board of 3 different ones, hoping to influence their business.  I believe his AUM are below $100mm too.

 

I hope that kinda answers your question.  Biglari played a more activist role, by wanting to create more value for the company he was buying an interest in, and was able to take control to help make the necessary changes, since managements wouldn't listen or try his recommendations.  Unlike a passive investment (Buffett back in the day...Solomon CEO, Wesco, Blue Chips) where he nicely(?) assumed the role/control because of his significant investment.

 

I hope it helps!?  :-\

[peter1234]

 

If you manage a small fund of <$100 mm, how do you take control of a public company listed in the US?

 

 

Ryan Morris hasn't necessary "taken control" of companies, but he is on the board of 3 different ones, hoping to influence their business.  I believe his AUM are below $100mm too.

 

 

I believe Ryan Morris talked to other major shareholders and got them to back him.

[TeddyLampert]

 

If you manage a small fund of <$100 mm, how do you take control of a public company listed in the US?

 

 

Hey Teddy

 

I would reference Sardar Biglari (running Biglari Holdings and his private investment partnership, Lion Fund, LP) or Ryan Morris of Meson Capital.

 

Biglari through TLF (the Lion Fund) bought i think around 32% of the shares on a small restaurant chain, Western Sizzlin back in the mid-2000s.  He nominated himself to the board, got it, then became CEO after forcing(?) the other members off.  He wanted to create value and turn the business around.  It's a guess, but TLF only had probably $25mm or so in AUM around that time.

 

Biglari also used Western and TLF to buy shares in Steak n Shake (a much larger company at the time than TLF and Western put together), do the same nomination, got it, then became CEO again.  (He only owned about 15% of the shares when all this occurred...but shareholders voted him and Phil Cooley in).  Subsequently restructured SNS and renamed it Biglari Holdings.  That's a pure play of taking control of a public company.

 

Ryan Morris hasn't necessary "taken control" of companies, but he is on the board of 3 different ones, hoping to influence their business.  I believe his AUM are below $100mm too.

 

I hope that kinda answers your question.  Biglari played a more activist role, by wanting to create more value for the company he was buying an interest in, and was able to take control to help make the necessary changes, since managements wouldn't listen or try his recommendations.  Unlike a passive investment (Buffett back in the day...Solomon CEO, Wesco, Blue Chips) where he nicely(?) assumed the role/control because of his significant investment.

 

I hope it helps!?  :-\

 

 

Frugalchief,

 

I was only vaguely aware of the Biglari story until you clearly laid it out. Thanks for sharing that! It really got me interested in learning more as I love case studies like this. If there's any helpful sources you can point me to, that'd be great. Otherwise I do plan to read the Biglari thread on CoBF.

 

Many thanks!

 

[frugalchief]

 

Frugalchief,

 

I was only vaguely aware of the Biglari story until you clearly laid it out. Thanks for sharing that! It really got me interested in learning more as I love case studies like this. If there's any helpful sources you can point me to, that'd be great. Otherwise I do plan to read the Biglari thread on CoBF.

 

Many thanks!

 

Hey Teddy

 

I'll post some stuff over on that thread to keep things categorized.  It's an interesting study IMO. 

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/bh-biglari-holdings/

 

FC