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Going public without an IPO
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May 25, 2000: 8:38 a.m. ET
StaffMark looks to unlock value of Edgewater rather than spin it off
By Staff Writer Kim Khan
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NEW YORK (CNNfn) - How do you take a company public without an initial public offering? In the case of e-solutions company Edgewater the answer may be to take control of the company that bought you.
Edgewater is a unit of staffing company StaffMark, which has struggled with a depressed share price over the last year. The company fell short of earnings expectations in the first quarter, but the performance of Edgewater was a bright spot. While StaffMark revenue grew 5 percent as a whole, Edgewater sales jumped 47 percent.
Fayetteville, Ark.-based StaffMark (STAF: Research, Estimates) believes it has significant untapped value in Edgewater that deserves to be realized in its share price, so it is selling off the traditional core of its business. For Edgewater it's an opportunity to become the core of a public company without risking a less-than-enthusiastic IPO market.
"Our peer group just doesn't want to own a staffing company," StaffMark CEO Clete Brewer told CNNfn.com. "They like the pure play."
Brewer admits StaffMark is embarking on a major transformation and a major repositioning, but he said the allure of a strong position in the e-solutions sector is too great to resist.
"E-solutions is just two years old and the industry is projected to be at $300 billion by 2005," Brewer said. "The growth dynamics are too appealing."
Edgewater has a strong position in middle-market e-solutions. The seven-and-a-half year-old company presently has 191 employees and is looking to reach about 300 by the end of the year.
Edgewater CEO Shirley Singleton told CNNfn.com StaffMark bought Edgewater with the intention of incubating the company, perhaps with an eye to spinning off the company at a later date.
Trimming the old economy fat
After announcing it was consulting Credit Suisse First Boston about strategic alternatives, StaffMark took its first step on the road to pure play status by selling its commercial services division and the use of the StaffMark name to the Stephens Group for $196 million.
The money from the sale will go towards retiring the company's current $288 million in bank debt. The next step is the public offering of London-based staffing company Robert Walters. According to analysts, that IPO should enable StaffMark to pay off the rest of debt, with about $100-150 million left over.
That money could be fed directly into Edgewater, but Brewer said he could not comment on specific uses at this time. Brewer said the company is still looking into what to do with rest of its business segments, including its IT and legal staffing services.
Matthew Roswell, an analyst with Legg Mason said the company would probably pare down to only Edgewater and the IT operations that support it.
The end-run IPO
Letting StaffMark management worry about the stock market and being able to concentrate on growth is a nice bonus for Edgewater. Tech stocks, even those with earnings, have found it difficult to see IPOs through to the end because of the volatility in the Nasdaq.
Now investors are not so eager to bet on future returns and only strong names and big offerings are translating into solid debuts.
Dealing with Web strategy and development, Edgewater is seeing the fallout of failed dot.coms first hand. The company tries to concentrate on customers at well-funded dot.coms and is very wary of taking equity over cash payment.
Singleton said by becoming StaffMark's core business, Edgewater is avoiding the morale-killing plunge that befell many tech companies.
"We're not going to get vertigo going from 120 to 20," Singleton said.
But Edgewater employees are not missing out on stock options - the holy grail of tech companies. Edgewater Senior Vice President and Chief Technology Officer Dave Clancey told CNNfn.com there is effectively a tracking stock that the employees can convert to StaffMark shares. The management team is also unconcerned about taking on a stock that is floundering.
"Looking at the market today I don't know anyone who's not in a tough market situation," Singleton said. She added the value of Edgewater should help the stock's price.
Once the process is complete, management of the company will likely remain with Edgewater, leaving StaffMark management in some kind of board capacity.
"If the company does indeed become just Edgewater, the CEO of Edgewater will become CEO for the company," Brewer said.
StaffMark also intends to change its name at some point - the money, of course, is on Edgewater. 
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