When a company starts its business operations, it has to ensure that it makes the right decision about the type of organization it will create i.e. sole trader, partnership, public limited company or private limited company. Deletk Systems Inc. is among the leading technological firms in the technology industry that is being run successfully by Kenneth E. deLaski. The company is a family-run business that is well-known for its competitive edge in making the appropriate decisions about its business operations.
Deltek Systems Inc. decided to go public in 1997 by offering its shares in the market. Every organization has to ensure that it makes the final decision of going ahead with Initial Public Offerings (IPO) after evaluating all vital factors properly. In case of Deltek, the company decided to offer its shares to the general public for numerous reasons. The foremost factor that led the company's management to go public was to avail the opportunity of accumulating funds for the expansion purpose. This trend was common during that time period as the software companies that were incurring losses were going public to utilize the chance of earning good amount of revenue.
According to the case, Deltek decided to go public because it allowed it the probability of acquiring additional funds for financing its growth along with enhanced visibility. When a company is listed in the stock market, its awareness is increased and it has an advantage of enhancing its prestige among its valuable customers. The central driving force that led to the decision of going public was that the employees of the company should be given the opportunity of reaping benefits for having the stock options.
Since the company was a private venture, there was no market for selling the company's stocks. Considering the scenario of the company, it wanted to offer its employees a platform to utilize the avenue of earning additional income. Since the technological firms were able to make further revenue from the stock market as a result of inflationary prices, it was a logical decision to exploit this proposal for improving the company's performance and financial viability of the employees.
Question 2
What advantages did Deltek find in going public once it became a public company? What disadvantages did it face?
Answer 2
When Deltek Systems Inc. became a public company in 1997, it was proficient in earning excessive amount of profit because its stock prices were growing at an accelerating pace. The biggest advantage to the company for going public was the ability of taking advantage of its strong position in the technology market along with the stock market. It had a robust performance initially but like all other companies it had to face various turbulences as the stock market has the feature of intense fluctuations throughout the year.
In late February 1997, the company sold about 2.9 million shares on the stock market for $11 each. During the following summer, the sales of the company grew at an exponential rate that was evident from its reported strong earnings in the stock market. By August, the earnings expanded by double amount and this trend continued until the next year.
However, afterwards, the company saw huge variations in the stock price of its shares as it oscillated in between $15 per share to $24.50 per share. This fluctuating behavior of the stock price had vast impact on the earnings of the company. In the middle of 1999, the earnings of the company showed steady growth but it leveled off to about $25 million sales every quarter. Even in this state, the company was profitable as it was earning over 20 cents on each share; however, the share price was starting to suffer because of the stock market's declining performance especially the technology sector.
The main disadvantages that the company had to encounter during this period were that the financial information had to be published every quarter and the employees of the finance department were starting to get burdensome for meeting the obligations of financial disclosure. In addition to the releasing of financial statements on quarterly basis, the company was busy answering round the year to the lawyers and accountants for the auditing purposes.
The company had to even meet the demands of meeting the expected earnings per share (EPS) to show that it was continuously growing. Hence, all these pressures impacted the performance of the company to a great extent and there was a drastic shift from its long-term goals to the satisfaction of the investors and maintenance of stable stock price.
Question 3
What distinguishes Deltek from the dot-com companies that rushed to go public? Why did those companies go public? Who gained?
Answer 3
The rising costs along with flatter sales growth in 2000 spring meant that Deltek had to excise on the bottom line. deLaski was proficient in identifying the loopholes in the dot-com companies that were impacting the stock market's functioning. Although it appeared that the dot-com companies were earning good amounts of revenue and had strong EPS but there were high speculations in the market that were causing such a drastic increase in their stock prices. deLaski was intelligent in spotting the hype in the market and it was during that time period that the company was evaluating the decision of retrieving back to its original organization structure.
When the Internet bubble burst, some of the companies that were severely impacted were MicroStrategy Inc., RWD Technologies Inc and others. Although Deltek did suffer too but the loss was at a minimal amount as it was already thinking of converting to the private company. Even before the summer season got over, Deltek shares were trading at a price of $8 and it was appropriate according to deLaski.
The company was able to recover to a significant extent in the latter half of the year and there was consistency in the sales; despite all this, the stock price kept on falling. From there onwards, the management team decided to work on the plan of buying back the company shares. At that point, the family still owned major portion of Deltek's shares i.e. 55%. Similarly, RWD Technologies Inc. also recovered by making the decision of getting privatized; the company was also a family business. Both of these companies were able to retain back their competent positions in the market.
Deltek was different from other dot-com companies as there were no outside shareholders who had more than 5% of the company's stock. It was able to successfully get privatized with debt amount of $17 million, equity money of $5million and cash amount of $28 million that was held by the company. The only problem that the company faced when getting privatized was that there was a lawsuit that was for the price offered to the shareholders of the company. It was offering $7.15 cash amount of each share that was less than the price offered at the time of going public. Only 4.1% shareholders voted against the offering and the company successfully won the case after two days.
Question 4
Why did Deltek decide to leave the public arena and become a closely held corporation once again? Do you think its management made the right decision?
Answer 4
The main factors that led the company to make the final decision of leaving the public company arena were too strict rules and regulations regarding the disclosures of financial statements, deviation from the company's long-term goal of strategic performance to the objective of maintaining the stock price and being answerable to the investors, auditors and regulators was getting burdensome for the employees.
Since the company has become a private firm now, it has been able to attain consistency in profitability which ranges in between $5 million and $10 million. The profit amount is lower than it used to earn during its peak time of being a public company but it is better to earn sufficient revenue without any fear of volatility in stock market. When it was a public company, it had many wise decisions related to the acquisitions that have helped the organization to grow exponentially.
Even the employees of the company are happy with management decision as they don't have to worry anymore about the fluctuations of the stock prices that impact their earning powers and stringent legislations as well. The finance department is working proficiently because it is able to manage its operations properly and reporting is become an easy task for the department's employees.
Since companies also have distinguishing features, it is vital for the owners to ensure that they make their decisions wisely. deLaski should not have considered the option of becoming a public company because it impacted its working to a great extent during that period. Hence, the owner has made a wise decision by retrieving back to the private company as it has helped in moving ahead on its long-term objective smoothly and perfectly. The concept of closely held corporation goes perfectly well with the personality of the owner as it was difficult to manage the regulations and performance of the company in the market simultaneously.
