Private Concerns

By Jessica Marquez

Oct. 14, 2006

Sue Hagen admits she had a few concerns about how going private would affect her company. As senior vice president of human resources at Dole Food Co., she was worried it would be harder to recruit and retain talent without the prestige of being a publicly traded company.

But chairman David Murdock’s reasons for going private were compelling. It was his dream to leave a legacy by refocusing on nutritional education and addressing obesity in the U.S.

To do so effectively, it would mean having a longer-term focus than a public company normally has, Hagen says.

“His vision didn’t exactly fit into a quarterly newsletter to shareholders,” she says. “These things wouldn’t have direct payback from a financial point of view, but it was his passion in life to do this.”

In March 2002, Murdock bought the 76 percent of common stock he did not already own, making Westlake Village, California-based Dole a private company. Murdock spent $2.5 billion, or $33.50 per share, to buy the Dole stock, which was then trading at $29.98 on the New York Stock Exchange. He also took on the company’s debt.

In the past few years an increasing number of publicly traded companies have gone private. The first wave hit in 2003 as a result of the Sarbanes-Oxley Act of 2002, which created a slew of costly compliance procedures for public companies in response to major accounting scandals at Enron and Worldcom. In 2003, 127 public companies went private, up from 92 in 1999, according to CapitalIQ, a New York-based provider of financial services information. The trend steadied in 2005, with 95 companies going private, but appears to be picking up this year. As of July 30, there had already been 86 of these transactions announced.

The reason for the acceleration is an increasing appetite among private equity investors. In the past few months, private investors have taken over a number of high-profile public companies, including hospital giant HCA and Philadelphia-based Aramark.

“What’s driving this recent wave is that private equity is returning more than the stock market,” says Robert Keiser, senior research manager at Thomson Financial. Overall, the U.S. Private Equity Index, tracked by Cambridge Associates, gained 27 percent last year, compared with a 5 percent return for the Standard & Poor’s 500.

But executives at public companies being wooed by private equity investors have a lot of workforce management issues to think about before signing a deal, observers say. And more companies are thinking through these issues, says Hector Calzada, senior vice president at Houlihan Lokey Howard & Zukin, a Los Angeles-based investment banking firm.

“In the late ’90s, a lot of private investors came in and took a slash-and-burn approach, thinking they could do the same work with less people,” he says. “But after the tech boom and bust, more of these financial sponsors realize the sacrifice they make when they use the thinnest workforce possible. They are looking more long term.”

Public companies that go private have to think about the cultural issues the change evokes, as well as create a plan to communicate the changes to employees. On top of that, they often need to devise new ways to recruit and compensate workers.

“You have to have a good sense of your organization,” says Mark Suwyn, chairman and CEO of NewPage Corp., a Dayton, Ohio-based paper company. As an associate with New York private equity firm Cerberus Capital Management, Suwyn helped take NewPage private in May 2005.

Communicating with employees about what going private means was the biggest challenge for Hagen at Dole, given the size of its workforce. Dole has 60,000 employees in 90 countries speaking 13 languages.

“Even short, straightforward messages are complex and involved to communicate,” Hagen says.

For the two months after the change was announced, Hagen and her eight-person team worked with department heads to conduct a mass communication campaign that included small and large group meetings, e-mails, newsletters and the company’s intranet. Since only one-tenth of Dole employees work at computers on the job, Dole made sure its managers understood the change and communicated it to employees. “Managers would go out into the field and explain it to workers,” Hagen says.

Dole’s message centered on what it meant to be a private company instead of a public one, and reassured employees their benefits and compensation would not change, Hagen says.

Repetition was key, she says. After the first couple of months, Hagen and her team made sure to repeat the message so that employees felt at peace with the changes.

A company shouldn’t underestimate employee apprehension when it announces it’s going private, Suwyn says. “There are always lots of rumors about how horrible it’s going to be after the change is made,” he says. “It can be debilitating and employers need to address it.”

Suwyn knows something about how to bring those worries to the surface. At Louisiana Pacific, where he was CEO from 1996 to 2004, Suwyn developed a method to address employee concerns and make them feel like their voices were being heard. He made it a point to visit various mills and offices annually and invite employees to share their concerns and grievances, with the understanding that he was there to listen to them.

After each worker spoke up, Suwyn would thank the person and say, “Let me make sure I understand what you are saying,” and then repeat back the employee’s concerns.

“It’s an exercise to get employees to bring tough issues to the table,” he says. In many cases, supervisors would hear their employees’ grievances and respond immediately, or sometimes Suwyn would address them. Such interaction fosters employee buy-in, he says.

Suwyn has continued to use this technique effectively, both as an associate with Cerberus and more recently to help NewPage employees feel more comfortable with him as CEO of a now-private company.

Simply explaining to employees the benefits of being a private company also helps.

“It would behoove the HR executives to think about selling the employees on the positives of this kind of change,” says Jack Lord, a partner in the Orlando, Florida, office of Foley & Lardner. “It can be particularly attractive to entrepreneurial-spirited employees if you tell them that now the company can do what it wants without getting approval from shareholders,” he says.

Many barriers are removed when a company goes private, making it easier to get things done, says Jamie Hale, a consultant with Watson Wyatt Worldwide, which went public in 2000. “The ability to share information within the organization was much easier when we were private,” she says.

Taking away options
At Dole, changing compensation benefits wasn’t a big issue, since only a handful of executives had stock options. Those options were exchanged for cash. Then Hagen and her team created a long-term cash incentive program to compensate those executives.

But for companies that rely heavily on stock option grants, experts say going private can be a challenge. Companies must find a comparable substitute and communicate to employees how the new incentive plan works, says Paul Sanchez, global director for organization research and effectiveness at Mercer Human Resource Consulting.

There are ways companies can replace stock options and still get the same benefits, he says. Employers can offer performance-based cash grants that employees receive after the company achieves specific goals. Another option is creating a variable compensation model where employees can vest over time.

The key to offering such alternatives, not surprisingly, is in the communication, Sanchez says.

Also, cash compensation is more expensive, and companies need to be prepared for that, Lord says. “A stock option is a lot cheaper than one dollar,” he says.

The bigger implication of removing options is how it affects morale, observers say. “Employers need to make it clear that they don’t value their employees less and they are going to continue to pay them accordingly,” Lord says.

Cultural issues
Executives also need to consider the cultural implications of going private, particularly since they won’t be under the same level of public scrutiny anymore.

“Private companies can find themselves in a heap of trouble by not following the same set of rules they did when they were public,” says Calzada at Houlihan Lokey Howard & Zukin.

It often requires more frequent communication and enforcement of compliance codes to “establish a culture of ethics,” he says.

In situations where a company is being taken over by private investors, management needs to make sure there is a sense of trust in the leaders of the organization, whether they are new or not. “HR managers need to understand the roles of executives in the new organization and communicate with employees,” says Hale at Watson Wyatt.

Management’s credibility can sometimes take a hit when private investors take over an organization. Even though they pledge to keep existing managers, employees may perceive that their leaders don’t have any control anymore and thus lose faith in them, she says. “If employees feel their leaders have lost credibility, it will affect their engagement and could increase turnover.”

Hagen says there weren’t any cultural ramifications for going private at Dole. Her concern about whether employees would view the company as less prestigious after becoming private also appears unfounded, she says.

“Recruiting and retaining employees has not been affected,” she says. When interviewing candidates, she talks about the things Dole is doing to encourage people to be healthy. She also emphasizes the decentralized structure of the organization, which allows employees to act independently.

“Today we have a different story to tell that still attracts people to Dole,” she says.

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