Lately, it seems like a lot of companies have decided to either sell out or go private. Especially small companies, burdened by the costs of the Sarbanes-Oxley Act. What's more, with the lack of analyst coverage on Wall Street, small-cap companies tend to be orphans -- with lackluster stock performance despite strong fundamentals. It's frustrating enough, apparently, to make their managements want to "consider strategic alternatives," as the corporate euphemism goes.
For example, in January, Cherokee (NASDAQ:CHKE) announced that it had hired UBS Investment Bank to "explore alternatives." Of course, this is a fancy way of saying the company is contemplating selling out or going private.
Cherokee licenses fashion brands, such as Sideout, Sideout Sport, Carole Little, CLII, Saint Tropez-West, Chorus Line, All that Jazz, Molly Malloy, and so on. Basically, this is a New Age virtual company that owns trademarks. There are no factories. There are no distribution centers. In fact, there are only 17 employees. Essentially, Cherokee gets licensing fees as its source of revenues. But it's a very profitable business. Last year, the company generated $36.3 million in revenues and $17.2 million in net earnings.
This week, another fashion brand company, Mossimo (NASDAQ:MOSS), decided to sell out. In this case, the buyer is the founder, Mossimo Giannulli. He wants to buy back the 35% of the company he doesn't own.
While Mossimo has a marquee distribution agreement with Target (NYSE:TGT), the financials are certainly not on par with Cherokee's. As an aside, we should not expect the same level of profitability from Mossimo given its lengthier supply chains and monies allocated to production, which eat margins. Also, the fact that it brings only one brand to market can subject its revenue stream to the whims of consumer tastes to a greater degree.
From 2003 to 2004, revenues increased from $19.9 million to $20.5 million, and net earnings fell from $4.6 million to $2.7 million.
Then again, according to the company, last year was a period of transition. That is, Mossimo invested in its infrastructure in order to enhance its performance at Target. In other words, the company is likely poised for improved profitability, i.e., its infrastructure investments are one-time costs. What's more, the improvements should result in higher margins on sales going forward.
But now, the founder wants the whole company to himself. Interestingly enough, he even indicated he will not "consider any other transaction involving his interest in the company."
Hey, why bring competition to the table when you want to buy a company? It certainly is unfortunate for public shareholders, as they might not receive the share-price premium that commonly occurs in a situation of this sort. But, no doubt, it is the hazard of a company that is majority-owned by the founder.
Fool contributor Tom Taulli does not own shares in the companies mentioned in this article.
