More than six years ago, Edward K. Duch stood up during Mod-Pac Corp.'s annual shareholders meeting and urged its executives to take the Buffalo specialty printing business private because it was too small for the added costs and burdens that come with being a publicly traded company.
Last week, Duch got his wish, when Mod-Pac's two top executives — Daniel G. Keane and his father, Kevin — offered to buy out all of the company's other shareholders for $7.20 a share.
“I thought I must have woken up from a dream,” said Duch, a former top Goldome banking executive who now lives in Florida. “Obviously, a beggar can't be choosey, but it's a step in the right direction.”
For small companies, going public can be a good way to raise the capital needed to fund growth plans. But for the smallest of those public companies, the burdens of being public can be severe.
Shareholders pressuring management for the growth that's needed to drive up the stock price and make their investment profitable. Investors and analysts asking pesky questions about strategy and plans that wouldn't be any of their business if the company was privately owned.
And then there are the costs. Bills for lawyers. Bills for accountants. Bills for making all of the regulatory filings that the law requires of publicly traded companies.
The Keanes, who declined to be interviewed, once told me they figured it cost Mod-Pac $500,000 to $1 million just for all of the expenses that come with being a public company — a cost that has gone up markedly over the past decade because of the more stringent Sarbanes-Oxley disclosure rules.
“It was obvious that the Sarbanes-Oxley regulations, the reporting requirements, those were taking up more than was on the bottom line,” Duch said.
“It's been a 10-year phenomenon, beginning right after Sarbanes-Oxley came out,” said Christopher Carosa, who runs the Bullfinch family of mutual funds in Honeoye Falls and has a small stake in Mod-Pac.
“It just made it harder for a company like Mod-Pac to be publicly traded,” Carosa said. “The cost of being public outweighs the benefits.”
That's especially true with companies like Mod-Pac, which aren't in high-growth industries and don't have either of the two main things that investors love to see: fast-growing sales and fast-growing profits.
Indeed, Mod-Pac's sales didn't budge from $48 million for a four-year span from 2007 to 2010, accompanied by losses during the first three of those years. Mod-Pac turned profitable in 2010 and made even more money in 2011 as sales jumped by 15 percent to $56 million. But the company has lost money during the first two quarters of this year as sales turned flat and the profitability of those revenues weakened because of the make-up of those sales and higher paperboard costs. The company rebounded strongly over the summer, with third-quarter profits jumping by 43 percent as strong sales of its custom folding cartons propelled revenues to an all-time high.
“They're not big enough to take over other people. They don't have the financial strength,” Duch said. “No one is going to invest in a localized printer.”
Mod-Pac was founded more than 120 years ago, but it went from being a private company to being part of a public one 40 years ago, when it was acquired by Astronics Corp., an East Aurora company that now makes aircraft lighting and electronics systems. Mod-Pac became a public company in its own right in early 2003, when it was spun off by Astronics.
At first, Mod-Pac thrived, thanks to a lucrative deal the company had to do the printing work for an upstart Internet-based printing business called VistaPrint, which happened to be founded by Dan Keane's brother — and Kevin Keane's son — Robert. By 2005, VistaPrint was pumping $12 million a year into Mod-Pac's sales, and the printing company learned how to handle hundreds of small print jobs quickly and profitably. It used the VistaPrint money to acquire state-of-the-art equipment for short-run printing and modernize its Elmwood Avenue plant.
But just as quickly as the VistaPrint business grew, it disappeared. VistaPrint decided to do its own printing work and, by 2006, Mod-Pac had a gaping hole in its revenue stream that it has struggled to replace ever since.
Not surprisingly, Mod-Pac's stock sagged along with its sales, tumbling from a peak of almost $18 in August 2005 to a little more than $1 in November 2008. Mod-Pac's investors started to squawk louder and louder.
Some suggested selling off some of the company's relatively new equipment to raise cash and ease its overcapacity problems. Others wanted Mod-Pac to drop its super-voting class of stock, which gives CEO Daniel Keane and his father, Kevin, Mod-Pac's chairman, control of 43 percent of the vote, while owning just 31 percent of its shares.
Still others, like Duch, urged the Keanes to take the company private, reminding Mod-Pac's management and directors four years ago “that they have a fiduciary responsibility to all shareholders, and not just the Keane family.”
But with such a commanding share of the stock's voting rights — the Keanes would need the support of only 7 percent of Mod-Pac's remaining shareholders to beat back any shareholder initiative or takeover bid that they opposed — Mod-Pac steadfastly resisted those shareholder entreaties.
The squawking from investors subsided as Mod-Pac started making money again in 2010 and its sales began growing again last year. Its shares topped $7 for a few days in April, only to slump again after the company reported its first– and second-quarter losses. By the time the Keanes made their buyout offer of $7.20 a share in cash, the shares were trading for $5.49. It finished the week at $6.90.
Even so, Duch thinks the Keanes offer of $7.20 per share is too low. He wouldn't be surprised if the bid ultimately is sweetened closer to $8 – roughly matching the company's book value.
“If you're a public company, there's always pressure to grow, and that's not always the correct strategy for a business,” Carosa said. “You can have a good business that's not growing. There are thousands of small businesses that are not growing. But they're able to comfortably support the owner and the salaries of the employees of that company.”
“Mod-Pac may be one of those companies that's more steady-as-she-goes,” he said.
Duch has a similar view.
“It's a small, family-run business,” he said. “It's obviously the right move for the company.”