About the same time Mr. Abbott went to Wall Street, Jorge Mas Santos, the CEO's son, began talks with Burnup & Sims, another construction firm that worked in Church & Tower's specialty – laying cable. Rather than take Church & Tower public, the Mas family decided on a reverse merger. Technically, Burnup & Sims acquired Church & Tower, but the stockholders of Church & Tower – members of the Mas family and partners – received the largest share of the equity. As part of the transaction, the company changed its name to MasTec in 1994.
What lessons does MasTec offer to entrepreneurs? First, although public-equity capital is money you never have to pay back, it comes with costs. For an initial public offering (IPO), the accounting, legal, and underwriting fees add up to "well north of a million dollars," says Mr. Abbott. However, MasTec illustrates creative approaches to offsetting those costs. "The biggest surprise [in the process] ended up being a pleasant one," says Mr. Candela. "The sale of non-core assets after the reverse merger effectively paid for the transaction."
Another lesson: Timing matters. "During the time when [MasTec] went public, the stock market was booming and equity was available at attractive multiples of earnings," says Mr. Candela. "The dilution [of shareholder equity value] was relatively cheap compared with today's valuations. Private equity was too expensive and forced companies to give up a larger measure of control than by going public."
In contrast, the current environment on Wall Street is "just not in an IPO mode," says one investment banker who requested anonymity. "The firms coming to market are not being well received."
CEOs can take advantage of the lull by preparing for a market upturn. For example, Mr. Abbott says the underwriters of an IPO will demand audited financial statements for three years. He also cautions CEOs against trying to "cash out" by going public, because underwriters may limit the amount of equity the CEO and partners can sell in the IPO.
Management also needs to make psychological adjustments to life in a public company. "You must be prepared to have the market evaluate your efforts on a daily basis. You get a report card every day in your closing stock price," says Mr. Candela.
Sometimes the market proves a tough grader. In April 2000, MasTec's stock reached a high of more than $60 per share; currently it trades in the $2 to $3 range. Yet company revenues have dropped only slightly, from $1.3 billion in 2000 to $1.22 billion in 2002. Other companies could quietly ride out such a downturn, but not those on the New York Stock Exchange, like MasTec.
Through it all, the company has not paid directly for its capital. "We have not declared any cash dividends since our inception, and we do not intend to pay any cash dividends, but intend instead to retain any future earnings for re-investment in our business," says the 2001 annual report. The Mas family still owns 45.8 percent of MasTec shares.
Besides financial details, CEOs pondering an IPO should consider the competitive implications. "Make sure you are prepared to operate in an 'open book,' full-disclosure mode," warns Mr. Candela. "Many operational components of your business will be disclosed in periodic filings with the SEC [Securities & Exchange Commission]. This can put you at a competitive disadvantage with some non-public companies that are not required to disclose details of their business operations."
Case Study: Sterling Financial
Most entrepreneurs would consider themselves blessed to have Charles Garcia's problem when it comes to raising expansion capital.
"The problem for us has been that a lot of people have thrown money at us and we've had to walk away," says Mr. Garcia, chairman and CEO of Sterling Financial Group of Cos., a Florida-based investment-banking firm.
"We're looking for the right partner at this stage of our growth."
|Top SBA Lenders to Hispanics|
|Lender||Number of loans to Hispanics||Value of loans to Hispanics ($M)||Total number of loans||Total value of loans ($M)|
|Bank of America||443||$26.1||3,918||$248.3|
|WFC Holdings Corp.||92||$11.8||959||$164.9|
|Wells Fargo & Co.||77||$15.3||1,244||$296.9|
|Source: SBA data provided to Hispanic Business upon request. Ethnic data based on borrowers' voluntary identification for 7(a) program loan approvals in FY 2002.|
© 2003 Hispanic Business Inc. Reprinting, copying, or transmitting all or part of this information requires written permission.
Sterling – which was named the nation's fastest-growing Hispanic-owned company by Hispanic Business in July 2002, on the basis of revenue growth over five years – is currently searching for an investor to assume an equity stake of as much as 30 percent in exchange for a cash infusion of between $10 million and $12 million.
Finding the right investor is more difficult than it may sound. As Mr. Garcia notes, Sterling's current capital needs are much too small to attract interest from large venture-capital funds. Moreover, the firm is intent on finding a strategic partner that shares Sterling's interest in the U.S. Hispanic community. The company would prefer to find a Latin American bank, but may consider a private equity source or a domestic commercial bank looking to penetrate the Hispanic market.
"It's the quality of the investor that's most important at this juncture," says Mr. Garcia, whose firm employs more than 400 people working out of 62 offices in the United States, Latin America, and Europe. "We want to become the leading Hispanic financial services firm in the United States."
Mr. Garcia readily concedes that Sterling is decidedly unlike most companies, in terms of both its accelerated growth cycle and its capital needs. The firm also enjoys a distinct capital market advantage by virtue of the line of work it's in. Sterling – which provides research in addition to investment banking and asset management and risk management services – has ready access to contacts and expertise that firms in other industries are typically forced to pay for.
"We haven't had the problems of a typical Hispanic entrepreneur because we have people working with us from the financial industry. We're a little bit unusual, but that's what we do for a living," says Mr. Garcia, whose company grossed $17.5 million in 2001 to rank number 227 on last year's Hispanic Business 500. The firm grossed $24 million last year.
Says Ricardo Rivas, head of investment banking at Sterling: "Charles is not your typical Hispanic entrepreneur. He has a lot of contacts both inside and outside the industry."
A former defense intelligence analyst, attorney, and White House fellow (see "Jack of All Trades," May 2001), Mr. Garcia founded Sterling in 1997, initially working out of a converted broom closet with a support staff of two. His startup capital consisted of $800,000 in personal funds and seed money from family and friends.
As the firm grew at a brisk pace, Mr. Garcia turned to his own network of financial firms to fund its expansion. Three years after Sterling's founding, he initiated the first of two rounds of venture-capital funding. CrossBow Ventures, which, like Sterling, is based in Florida's Palm Beach County, was the lead investor in both rounds, which together raised about $8 million. CrossBow still holds a minority equity stake in Sterling.
Today, Sterling isn't seeking expansion capital in the traditional sense – that is, to fund new facilities or infrastructure improvements – but instead is looking to "strengthen its balance sheet" as a means to attract new business.
Until now, the company has on occasion been unable to meet the minimum balance-sheet requirements of prospective corporate partners, and as a result has missed out on some lucrative municipal bond and IPO (initial public offering) deals, according to Mr. Garcia.
"We had to leave a lot of money on the table," he says. All told, he says he has spent roughly $10 million to grow his company over its first five years.
As for the relative ease with which his firm has been able to find capital, Mr. Garcia credits the staff he has assembled.
"We have been very fortunate. We have a very strong management team, and that has given investors a lot of confidence. That's the key, because investors really invest in people," he says.
Introduction and case studies written by Senior Editors Joel Russell and Tim Dougherty. Captains of Capital directory research by Business Economist Juan Solana and HispanTelligence® research staff.