ON APRIL 26, WILLIAM LYON, chairman and CEO of William Lyon Homes, announced his intention to buy the company's outstanding publicly held minority shares for $82 each and return the Newport Beach, Calif.–based builder to private status. That day, the company's stock closed at $75.25.
However, it looks like Lyon may have to dig deeper into his pockets to seal the deal. By the closing bell a day later, April 27, traders had propelled the stock price well beyond Lyon's offering price, to $85.98. At press time, it had risen even further, to $90.19.
Could it be a sign that the process of taking the company private may be bumpier than expected? The company, which has been publicly held since its 1999 merger with The Presley Cos., postponed its annual stockholder meeting in light of Lyon's plan. And in the weeks since the announcement, at least one class-action suit has been brought against William Lyon Homes, alleging a “grossly inadequate and unfair price.” (William Lyon Homes declined interview requests for this article.)
The bumps in the process aren't unusual, according to another builder who experienced them recently. “I've gone through the process of taking companies both public and private. The process of going private is more extensive than going public,” says Steve Kahn, CFO of The Rottlund Co., the Roseville, Minn.–based builder that went private in 2002.
President David Rotter and chairman Bernard Rotter, the family members in charge of Rottlund, decided the company wasn't getting any benefit out of being public, Kahn says. As a relatively small public company—Rottlund grossed $261 million in revenue in 2001—Wall Street analysts were not covering its business, and shareholders had little liquidity.
What's more, the company had the added expenses of being public, including SEC filings, and attorneys' and accountants' fees. All told, Kahn estimates that it cost the company an additional $100,000 to $150,000 per year to be publicly held. Consider, too, that Rottlund was public in the days before Sarbanes-Oxley, which has increased public companies' accounting and auditing costs substantially. (USA Today reported earlier this year that KB Home spent 68 percent more on audit-related costs in 2004 than in 2003, and in 2003, Newport Beach, Calif.–based Capital Pacific Holdings cited the increased compliance costs associated with Sarbanes-Oxley as its reason for voluntarily delisting from the American Stock Exchange.)
The process of going private took between four and five months for Rottlund. After working with an investment bank to obtain a fairness opinion—the price at which the stock buyback would be set—the company filed preliminary documents with the SEC, which conducted a thorough review of the Rotter family's plan. Shareholders were asked to tender their shares, and finally, the shareholders voted on the plan.
Like William Lyon Homes, Rottlund also fought a class-action suit over the price the family offered shareholders. The suit was settled quickly, Kahn says, adding that the settlement “was not a substantial amount.”
Rottlund didn't cut costs in 2002; the final bill for going private came to between $700,000 and $800,000. But Kahn says it's been a net positive. “Now we don't need to be as concerned about quarterly revenues and blips,” he says. Good thing, too, as the Midwest has been prone to blips during the past several years. (Rottlund's closings dipped 6 percent in 2004, when it delivered 1,450 homes for $334 million in revenue.)
The company finances its projects through a revolving line of credit that Kahn describes as adequate for the builder's needs. It's been helped, too, by a bustling Florida division. Those returns have been pumped into new projects and ventures, including an expansion this year into Sarasota.
