The Merger Route To Going Public

While the basic IPO market stutters, ambitious private companies are exploring the less traveled side-door road to public ownership by paying stock to acquire publicly traded concerns. At least two deals in which the private acquirers wound up as the publicly traded survivors surfaced in recent months, and more may be on the way. In the more widely publicized of the two transactions, Advance Auto Parts, based in Roanoke, Va., agreed to acquire the smaller, New York Stock Exchange-listed auto parts retailer Discount Auto Parts Inc. Advance was to pay $7.50 in cash and 0.2577 share for every share of Lakeland, Fla.-based Discount Auto in a $267 million transaction that strengthens Advance Auto’s position as the second-largest player in the consolidating auto parts retailing field. The second deal links privately owned Cogent Communications Group Inc., a Washington, D.C.-based Internet service provider, with money-losing Allied Riser Communications Corp., a Nasdaq-traded firm that offers data communications services in commercial office buildings. Cogent was to issue an undisclosed amount of stock for Allied Riser’s common shares and convertible subordinated notes. These deals differ from the “reverse takeover,” the more commonly used vehicle for skirting the traditional IPO to take a private firm into public ownership. In the reverse takeover, the technical “acquirer” is usually a corporate shell with little more than publicly traded shares, while the “target” is a fairly substantial private company. “Selling” stockholders wind up in control of the combined company and get to own a publicly traded stock. The merger-based shortcut can be appealing if the private company wants to bypass the expensive and time-consuming registered IPO process and gain public shares for use as an acquisition currency. It has the potential for increased use in consolidating industries that have a significant proportion of well-established privately owned players and in cases where the public partner is either having trouble or suffering from a depressed stock price. On a combined basis, Advance Auto and Discount Auto will be operating more than 2,400 stores in 38 states with sales in excess of $3 billion. The deal allows Advance, which is well represented in the East and Midwest through nearly 1,800 stores, to expand its presence in the Deep South, notably in the states of Florida, Georgia, Mississippi, Alabama, and Louisiana. Companies in the retail auto parts business have been facing a series of operating and profit problems as they try to adjust to a variety of adverse forces ranging from the sour economy to the technical skills required to repair 21st Century cars containing higher technology computer controls and modular parts. Randy Barba, a vice president and auto industry expert at management consulting firm Accenture, says that the retailers also must deal with an influx of non-branded parts and dislocations that have resulted from a reduction in the ranks of parts jobbers, much of it through mergers and acquisitions. But Barba also believes that a major, albeit less appreciated, problem that the parts stores face is handling the growing pressure from casualty insurance companies to cut into repair costs -a trend that parallels cost-containment efforts by health care insurers. “The insurance companies want to reduce the costs of parts and repairs,” he says. “There is a lot of pressure to find ways to reduce the cost of parts to the customer, and that’s going to grow.” All of these forces have resulted in “margin compression” for the parts chains and have driven them to press acquisition-based consolidations of their “overly fragmented but overly competitive market,” Barba notes. “In general, it’s just plain hard to make money in the parts business,” he says. “There is a high degree of competition, and that makes it hard to make money.” An Advance spokesman did not return a call for comment.