FORT WAYNE – Vera Bradley Inc. has 175 million reasons to convert to a publicly traded company.
That's how much the Fort Wayne maker of quilted cotton handbags, luggage and accessories expects to raise from its yet-to-be-scheduled initial public offering, or IPO.
With that kind of money at stake, the drawbacks of being a public company might seem insignificant.
But numerous now-private companies disagree. They've given up access to shareholder money to avoid the costs of complying with complicated reporting rules imposed by the Securities and Exchange Commission.
Economic conditions also affect the number of companies launching IPOs.
In the go-go '90s, for example, IPOs peaked at 675 one year. But only 41 companies issued public offerings last year, when the country was still grappling with the worst economic downturn since the Great Depression.
John McConnell, a finance professor at Purdue University's Krannert School of Management, said the IPO question is less pressing during a recession.
"Business prospects have been pretty dismal for the past three years," he said. "If there is no expansion of business, there is no reason to raise capital."
Public vs. private – each organizational model has advantages and disadvantages. Vera Bradley's challenge is to maximize the benefits of being publicly traded while minimizing the downside.
The three major drawbacks are costs of compliance, loss of privacy and loss of control.
Vera Bradley's IPO filing makes it clear that company leaders agree to the first two conditions but aren't willing to compromise on the third.
Playing by SEC rules
Bankers work in one of the most highly regulated industries in the U.S., but even they recoil from preparing the paperwork needed to keep SEC officials happy.
Northeast Indiana Bancorp Inc., FFW Corp. and Peoples Bancorp have all deregistered with the SEC in the past six years. The area companies balked at the cost of complying with the 2002 Sarbanes-Oxley Act, which mandates tougher accounting practices for public companies.
The law was prompted by investor fury after corporate scandals involving Enron, WorldCom and Adelphia. After the companies imploded, investors learned details of accounting loopholes and special-purpose entities used to hide billions in debt from failed deals and projects.
Star Bank Insurance Private Advisory has remained private because of the costs of meeting regulatory requirements, President and CEO Jim Marcuccilli said.
The Fort Wayne bank is closely held by about 250 shareholders. Two families retain about 40 percent ownership.
Some companies take the public plunge when they want to quickly raise money for rapid expansion, Marcuccilli said. Star Bank, which operates 46 bank offices and eight insurance offices, has sidestepped that need by growing more slowly, controlling expenses and carefully choosing which markets to enter, he said.
Community banks might have an easier time of saying no to shareholder money than companies in industries that require major investments in factories, equipment and raw materials.
Steel Dynamics Inc., which was founded in 1993, was private until it started making steel in 1996, spokesman Fred Warner said.
The Fort Wayne company needed to raise capital in the public market to support growth beyond its first location, a $300 million minimill in Butler, and to repay substantial startup debt, he said.
Just as large companies can almost be compelled to go public, smaller ones can be overwhelmed by the process.
Cathy Brand-Beere, president and founder of DeBrand Fine Chocolates, said the Fort Wayne boutique chocolate company is too small to consider issuing stock.
"We haven't even entertained the idea at this point," she said. "We're nowhere near the size of Vera Bradley."
Curt Brown, president of Tower Bank from 1998 to 2006, is one of the rare people who shrug off the cost and hassle of SEC reporting.
"It creates a lot more work, but it's not unproductive. It keeps you sharp," said Brown, now private equity manager for Ambassador Enterprises.
Preparing mandated disclosures helps both public and private companies, he said.
"It's complex," he said. "It adds, certainly, layers of processes and duties, … but you do get benefit from all you do."
Vera Bradley's IPO filing acknowledges the higher cost of running a public company.
The company expects "a substantial increase in legal, accounting, insurance and other expenses in the future, which will negatively impact" earnings, the document states.
Public wages
Among the required disclosures, publicly traded companies must report how much they pay key executives. Those documents are available to the public on the SEC website.
Vera Bradley's IPO filing reveals the salaries of founders Patricia Miller and Barbara Baekgaard and of CEO Michael Ray, among others.
Miller, 71, national spokeswoman and director, was paid $483,402 in fiscal 2010. Baekgaard, 71, chief creative officer and director, was paid $480,477. The $2,925 disparity is attributed to differing car allowances given to the women.
And Ray, 49, was paid $728,899, including a salary of $410,232.
Executive vice presidents Jill Nichols, 49, and Kimberly Colby, 48, also drew more total compensation than the company founders in fiscal 2010.
Nichols, who oversees philanthropy and community relations, was paid $639,275. Colby, the head of design, was paid $637,775.
The executives' base salaries and bonuses were set after the directors hired Towers Watson to prepare an industry compensation report, adjusted for revenue size, according to the IPO document. The directors are Miller; Baekgaard; Ray; P. Michael Miller, 72; Robert Hall, 51; and John Kyees, 63.
Only Kyees meets Nasdaq's independent director requirement. According to Nasdaq.com, an independent director is a person with no connections to the company.
The company plans to create a majority of independent directors by adding members over the next 12 months, according to the filing.
Jeffrey Blade, 48, chief financial and administrative officer, joined the company in May. C. Roddy Mann, 40, executive vice president for strategy and business development, joined the company in December 2006. Matthew Wojewuczki, 40, executive vice president for operations, joined the company in December 2003. Both Mann and Wojewuczki were promoted and given new titles in April.
McConnell, the Purdue professor, said going public will spur Vera Bradley to create more executive-level jobs.
As the manufacturer executes its business strategy of opening more retail stores nationwide, its payroll will continue to grow. Northeast Indiana won't benefit from the additional retail jobs and won't see many more production jobs. Those are mostly in Asia, the company revealed in the filing. But the company will be adding accounting and other white-collar positions, McConnell said.
The new executives' current – or fiscal 2011 – salaries are not disclosed in the IPO filing. Regardless of the employees' preferences, their incomes will be public going forward.
Brown, formerly of Tower Bank, said he doesn't see that as a major invasion of privacy. He believes leaders of public companies should conduct themselves with integrity at all times – whether in public or private.
"I guess it just depends who you are. In my opinion, you should live your whole life in a holistic way," he said. "But a lot of people would not appreciate that level of scrutiny."
Money isn't the only sensitive topic touched on in the SEC filing. Executives also reveal for the first time that "the significant majority of our products are sourced internationally."
Before 2006, most of Vera Bradley's finished products were made from cloth woven in the U.S. Now, most of the cloth comes from suppliers in China and South Korea, where many of the items are also sewn. The company recently opened an office in Dongguan, China, to increase quality control.
In March 2008, four companies reported losing sewing contracts with Vera Bradley, putting about 750 people out of work in Fort Wayne and Van Wert, Ohio.
But Vera Bradley has said it plans to vertically integrate its operation by bringing formerly outsourced sewing jobs in-house.
It announced plans in August 2008 to lease a New Haven building and hire 490 sewers.
The company said it would continue to outsource some sewing to China but declined at that time to specify a percentage of work being sent overseas.
Among the potential threats to the company's success: organized employee work stoppages, unrest in China or South Korea and currency changes, the IPO document says.
Also, the company reveals information valuable to competitors, including its growth and product release strategies.
The trade-off, of course, is $175 million for the company and its owners.
Brown said launching the IPO likely will give Vera Bradley's owners more personal financial flexibility. They'll be able to take cash payouts and place the money in other investments instead of having the bulk of their wealth tied to one business.
Keeping the reins
When private companies go public, the leaders traditionally give up a degree of control.
"They're not owners, they're managers," said Warner, of Steel Dynamics.
But Vera Bradley's IPO filing makes it clear the current leaders are not abdicating anything.
"Because a limited number of shareholders will control the majority of the voting power of our common stock, investors in this offering will not be able to determine the outcome of shareholder votes," the filing states in bold italic letters.
Although the percentage is left blank, the document makes clear that Baekgaard, Miller and husband P. Michael Miller will directly or indirectly own a block that will "exercise significant control over all matters requiring shareholder approval."
"These shareholders may exercise this control even if they are opposed by other shareholders," the document states.
The IPO acknowledges "this significant concentration of stock ownership may adversely affect the trading price of our common stock should investors perceive disadvantages in owning shares of common stock in a company that has controlling shareholders."
Brown said public companies can fall into a trap where the long-term view is never more than three months – the end of the next quarter.
"It's very hard not to keep your eye on the stock price and how the markets react to whatever," he said. "When it's your money, it's your money. But when you go public, it's not your money anymore."
Biomet Inc., the Warsaw-based orthopedic devices maker, started as a public company but is now owned by a private equity consortium, although the company still issues publicly traded bonds.
Bill Kolter, corporate vice-president - government affairs, public affairs, corporate communication, cited the private equity partners' combined business experience as an important asset to the company.
"The participation of our partners and board has been key to making this model work as well as it has for Biomet," he said in an e-mail. "One other advantage is the ability to build the business without having to endure stock price fluctuations."
Warner, of Steel Dynamics, said many entrepreneurs trade company control for the money needed to execute grand growth visions.
But with Vera Bradley's IPO, he said, "they kind of have the best of both worlds."
By the numbers
24% – Compound annual revenue growth from 2005 to 2010
225,000 – Number of Facebook fans of Vera Bradley
23 million – Number of visits to VeraBradley.com in fiscal 2010
Source: Vera Bradley Inc.'s IPO filing
