Feeling the exuberance of the 1990s, Gerald Cassidy tries to take his lobbying firm public. But his confidence collides with market reality.
By Robert G. Kaiser
By 1998, Gerald S. J. Cassidy had already spent years looking at different ways he could use his successful lobbying firm to create both substantial capital and personal wealth. The creation of an Employee Stock Ownership Plan (ESOP) in 1989 had put $15 million in his own pocket, but he had bigger dreams.
Cassidy was swept up in what Alan Greenspan of the Federal Reserve Board called the "irrational exuberance" of the years from 1995 to 2000, when the stock market rose by more than 300 percent. "We were in the era of up, up, up," said Lester "Ruff" Fant, Cassidy's lawyer and chief financial advisor. Cassidy's company's revenues had reached nearly $50 million a year, but he thought they could go to $250 million a year if he made the right acquisitions. He had an appetite for more.
"I saw us doing what I thought would be a major departure," Cassidy recalled in a recent interview -- building the biggest and broadest lobbying colossus ever created. He had a list of acquisitions he wanted to make, including a firm "that was doing really topflight 'grass tops'," meaning lobbying of state and local leaders and opinion makers; several radio stations, a publication and advertising firms that would do "public affairs advertising to complement lobbying," and "some of the other premier lobbying operations in town, perhaps a couple of the very best." He and Fant began talking to firms they might try to buy; several seemed interested.
But acquisitions could only be consummated if Cassidy could find a source of big money -- $40 to $60 million, he reckoned. He and Fant had an idea for how to do it. He would sell Cassidy & Associates to the public through an "initial public offering" or IPO. In other words, he would sell shares in his own creation to investors, hoping thereby to raise those millions that would allow him to grow from big to enormous.
This was more than a pipe dream. Fant and Cassidy struck an underwriting deal with Friedman Billings Ramsey (FBR), an investment banking firm headquartered in Arlington that was aggressively courting companies that they could "take public" through stock offerings. Fant filed the necessary paperwork with the Securities and Exchange Commission, including an "S-1," a document meant to explain why anyone would want to invest in the firm. (view the document [pdf]) It was a remarkably detailed description of Cassidy and Associates and how it did business.
This document created a sensation inside Cassidy & Associates because it revealed details that many employees hadn't known, including the salaries of all the firm's principals. The numbers were striking to many of his colleagues, even though Cassidy had reduced his and his top associates' to make them more palatable to potential investors. At earlier stages of the firm's history, Cassidy had paid himself much more than the $877,000 in annual salary and bonuses than he reported in the S-1 -- as much as $5 million in the late 1980s.
The S-1 confirmed what many Cassidy employees long suspected, that former Rep. Marty Russo, hired by Cassidy in 1993, made more money than nearly all of them: just shy of half a million dollars in 1998. Russo was an unpopular figure in the firm, a man whose preoccupation with golf seemed to many of his colleagues to exceed his commitment to their business. Seeing his big remuneration package in black and white upset many of the troops. The S-1 disclosed that there were 192 employees on June 30, 1998, including 73 "senior professionals." There were bigger law firms that also lobbied, but these numbers made Cassidy & Associates the largest lobbying and public relations outfit in Washington.
Taking the firm public was a bold move, so bold that some employees didn't think it was serious. A number of the employees were amazed that Cassidy, who had always avoided the public spotlight and kept the affairs of his company private, would suddenly put so much information on the record. There was no precedent for it -- no lobbying firm had ever sold shares on the stock market. And although Cassidy had made a lot of money and took in tens of millions in revenue, his business had problems. His public-relations arm, Powell Tate, was aparticular headache.
Between 1992 and 1996, Powell Tate had been profitable. The lobbying business fell on hard times after the 1994 elections, when Republicans took control of Congress; Cassidy & Associates remained healthy because of Powell Tate's good earnings. But managing Powell Tate's growth proved difficult, according to James Fabiani, then the chief operating officer of Cassidy & Associates. Though Powell Tate continued to earn substantial revenue, reporting $8.6 million in the first six months of 1998, the period just before the proposed stock offering, its costs (primarily payroll) exceeded revenue in every year after 1996. Profits from Cassidy's lobbying business covered the losses and the big salaries of senior employees.
Jody Powell, the charismatic former press secretary to President Carter, suffered a heart attack in December 1997, and Powell began looking for someone who could revive Powell Tate's fortunes and eventually take it over. He approached Michael D. McCurry, another presidential press secretary -- to Bill Clinton. McCurry was flattered: "I had so much respect for Jody," he said in an interview. He talked to Powell seriously enough that others in the firm got the impression he was about to join them. Some employees were told that the firm would get a new name: Powell Tate McCurry. But in the end McCurry backed out. "I didn't want to run a PR firm," he said. He never even met Gerald Cassidy.
As the underwriter of the IPO, Friedman Billings Ramsey was supposed to place Cassidy shares with interested investors, beginning with institutional investors. But FBR never found buyers. The IPO died without ceremony in the summer of 1998; Cassidy & Associates would not be the first publicly traded Washington lobbying firm after all.
Cassidy himself remembers this setback as a consequence of external events, specifically the Asian economic crash of 1997 and the collapse of the Russian ruble in the summer of 1998. "IPOs went dead," Cassidy said in an interview. In fact, hundreds of American companies completed IPOs in 1998 and 1999, but U.S. stocks did tumble in the summer of 1998 and the timing was bad for Cassidy.
Fant, Cassidy's lawyer and co-author of the IPO idea, recalled that they took the matter next to the Wall Street firm of Donaldson, Lufkin & Jenrette. Fant thought the DLJ people were more knowledgeable. They said they could complete the IPO, they had the necessary contacts to find buyers for the stock, but they warned that as the lone company in the lobbying field whose shares were publicly traded, Cassidy & Associates would suffer. Fant remembered DLJ's warning: "For a single company there will not be enough trading volume, and analysts are too lazy to write a report and keep investors apprised of how you are doing. So you'll be a public company, but your stock will do nothing but go down." DLJ offered an alternative course of action, Fant recalled: "They said we think we can sell [the firm] for you for a good price." Cassidy and Fant agreed to give it a try, and in the spring of 1999 DLJ circulated a "confidential information memorandum" to possible purchasers of what was formally called The Cassidy Companies, Inc.
The S-1 Fant wrote described Cassidy's business effusively as "a leading provider of government relations services, public affairs communications and opinion research. ..... " But this language was tame compared to the enthusiasm contained in DLJ's memo:
"Cassidy ..... is the nation's premier communications firm in providing expertise in government relations and public affairs. The company is the largest government relations firm and one of the largest independent public affairs firms in the United States [and] the only communications firm that has successfully integrated its government relations and public affairs businesses. ..... The company commands premium compensation for its services relative to its peers [and has enjoyed] outstanding profitability growth. ..... It [is] well positioned to acquire other government relations and public affairs businesses. ..... " The DLJ document did not report that Powell Tate was losing money. (view the document [pdf])
By the time DLJ put the firm up for sale, relations between Cassidy and his longtime chief operating office, James P. Fabiani, had nearly ruptured. The two men were at odds over Galway Partners LLC, an investment banking operation Cassidy had formed in 1995 and supported ever since with funds from the Cassidy firm. But Galway had never made even a nickel of profit and Fabiani saw it as nothing but a drain on the firm. Cassidy reacted angrily to Fabiani's challenge.
But Cassidy's internal problems paled by comparison to the excitement felt when that confidential memorandum from DLJ landed at the New York office of Shandwick International, a big British public relations firm that was expanding in the United States. Stephen R. Conafay, who ran the New York office, recalled being impressed by the size of the Cassidy Companies' revenue number, a revered index in the world of public relations. The number for 1998 was just less than $50 million; adding it to Shandwick's bottom line would quickly make it one of the top PR firms in North America. This was the same firm that had approached Cassidy in the late '80s.
Michael J. Petruzzello, head of Shandwick North America, which itself was acquired in 1998 by the Interpublic Group (IPG), a giant global conglomerate, described 1999 as a moment when companies like theirs were eager to make more acquisitions, because the value of their stock rose with, and often much faster than, their total revenues. "At board meetings they always wanted to hear that we had more acquisition deals working," Petruzzello recalled. Irrational exuberance was in the driver's seat.
Shandwick liked Gerald Cassidy's ideas for future expansion. Its executives endorsed his plans to pursue acquisitions both in the United States and overseas. Cassidy was enthusiastic about the prospects for pursuing the ambitions that originally motivated his decision to try to take his firm public.
A deal was struck. No purchase price was announced, but news accounts put it at $70 million to $80 million, which stunned other lobbying firms in Washington. Was their business really so valuable, they wondered?
Well, no, it wasn't. The real sale price was about $60 million, including $15 million in cash, the rest in high-flying IPG stock. Because ESOP debt had generated paper tax losses, Shandwick/IPG was able to take an immediate $14 million deduction from its taxes, an important sweetener. In the heady atmosphere of the times, the Shandwick people thought they had made a great deal. They were wrong.
Washington Post researcher editor Alice Crites and staff researcher Richard Drezen contributed to this report.
Next: The deal sours, and Cassidy's firm is threatened.
Key Related Materials
Gerald Cassidy Responds to This Chapter
I find it truly staggering how The Washington Post has continually ignored facts in favor of pejorative and misleading anecdotes. Readers were subjected to that style of reporting in today's article which covers the sale of Cassidy & Associates to the Interpublic Group (IPG).
Early on, Mr. Kaiser provided me proprietary documents that he obtained from former shareholders of the Cassidy Companies Inc. (CCI). He admittedly was having difficulty determining the true sale price of our company. Now it doesn't take a seasoned business reporter to understand general business concepts, but after countless hours and days of discussion, Mr. Kaiser proved otherwise.
For the record, the initial acquisition of CCI by IPG was priced at $83.5 million. This is information Mr. Kaiser had available in the documents he possessed which reflected an actual price that was substantially more than his reporting that "the real sale price was about $60 million." Mr. Kaiser refuses to consider items that were part of the sales price such as cash for unallocated ESOP shares, assumed excess debt and retirement of the external ESOP debt which brought us to a sales price of approximately $80 million.
An easy way for readers to understand this concept is when you buy a home and pay $500,000 and it has a $200,000 mortgage on it, the owner is only receiving $300,000 because the mortgage has to be paid off. Just as the homeowner, the shareholders didn't receive the total sales price, but the amount due to them after debt and other costs were paid. This is the simplest way to explain the issue, but it seems to baffle Mr. Kaiser.
His remark about "high-flying IPG stock" is wrong too. IPG stock was valued at $38.55 per share at the time IPG acquired Cassidy. A year later, when shareholders were free to sell their stock, IPG was trading at $42.69 per share. In fact over the 26 week period between November 3, 2000 through April 23, 2001 IPG stock had weekly closing prices in excess of the acquisition value in all but two of those weeks. We also sponsored several seminars with financial advisory firms that provided ideas and strategies on how best to manage the stock, but unfortunately only a few shareholders took advantage of those opportunities.
As far as damaged goods, I would again ask Mr. Kaiser to use the information he has and actually any reader can find. In 2000, the first year under IPG ownership, Cassidy & Associates' operating margin was 33% and went on to reach historic levels in revenues reported under the Lobbying Disclosure Act (LDAs). In fact, the Capitol Hill newspaper Roll Call reported in 2003... Cassidy, for example, hauled in $28.9 million in fees in 2002 to once again claim the top slot in the rankings.
Mr. Kaiser's characterization of Powell Tate was just as inaccurate. If he checked his facts, he would find from 1996 to 2001, Powell Tate experienced solid profits each year. I am proud of how Jody Powell was able to build one of the most respected public affairs teams in the nation.
-- Gerald Cassidy
Jody Powell Responds to This Chapter
I guess the question is: "Who cares about the P&L of a small company at the turn of century. The answer is, somewhat to my surprise, "I guess I do." Yesterday, Mr.Kaiser quoted James Fabiani, a decidedly former CCI executive, as alleging that Powell Tate had never turned a profit after 1996. As Gerry Cassidy pointed out in his response, that just ain't so. Fact is, Powell Tate has been profitable in each and every one of its 16 years, with double digit margins in all but two.
My interest in correcting the record has mostly to do with fairness to the many good people who built and sustained the company through some great times and some tough times. They deserve better from Mr. Fabiani, who profited greatly from their success while contributing less than nothing to it.
Others may find the matter mildly interesting as it something of a cautionary tale, falling under the "Figures don't lie, but . . ." heading. The issue is a slippery little parasitos called "Corporate Overhead." In the mid-nineties, Mr. Fabiani came up with the scheme of allocating costs that had been on his books to other companies in the family. I was willing to entertain the idea, but it quickly became apparent that there was no real way to determine a fair allocation, nor was it possible for me to determine whether the expenditures were reasonable. This was of interest to the people at Powell Tate because our bonuses were determined by our profit margins. After some flailing around with Mr. Fabiani, I proposed to Mr.Cassidy and he readily agreed, that we be evaluated and rewarded based on our operating profit, as had been the case since the company was founded; and I would quit arguing with Fabiani about the amount and appropriateness of overhead expenses.
That worked fine at the time, and I had largely forgotten the matter until yesterday. In an effort to determine how Mr. Fabiani had come up with his allegation, I had old financial statements pulled. And, there it was, a run of numbers that would make a grown man giggle. From less than 10% of revenues in 1996, Mr. Fabiani's overhead allocation to Powell Tate rose to 26% of revenue in 1999. By 2001, with the addition of Shandwick and IPG overhead, the company would have had to generate an operating profit of 38% just to "break even."
In closing, a brief word about comments from the two former IPG executives who were quoted in support of Mr. Fabiani's accounting methods. First, it should be mentioned that they, like Mr. Fabiani, were notable consumers of corporate overhead and thus likely to take a more kindly view of it than the rest of us. Second, during the years referenced, the difficult period of the sale and merger, Powell Tate produced operating margins that were lower than usual but still more than double the operating margins produced by IPG.
-- Jody Powell
Robert G. Kaiser on Cassidy's Response
Mr. Cassidy spent many hours trying to explain his view of the value of the sale of Cassidy's firm to IPG. From the beginning, I told him I was interested in what the business world considers the classic way to measure the value of such a transaction--the amount received from the buyer by the shareholders of the seller. In other words, how much did Cassidy and his fellow shareholders receive from IPG for the company? In the last communication to me on this topic, Mr. Cassidy's office provided a spreadsheet that said the "total consideration from IPG distributed to Cassidy shareholders" was $61.347 million. Three executives of IPG who worked on the transaction told me the value of the deal was a little more than $60 million. In Chapter 17 I wrote that the price was "about $60 million."
Regarding IPG stock, as Mr. Cassidy notes, it was trading in the high 30s when the purchase of Cassidy was completed on Nov. 1, 1999. This followed three years of steady increases in its value. After the sale IPG shares rose further, reaching their all-time high of $55.75 on Dec., 10, 1999. Soon afterward they began a long-term decline, reaching about $20 in September 2001. On March 27, 2007, IPG shares closed at $12.41.
Regarding the "damaged goods" reference by Mr. Cassidy, I did not use that term nor am I sure what he is referring to. Chapter 17 describes a big lobbying and public relations company that sold itself for $60 million, hardly "damaged goods."
Regarding Powell Tate profits, two people involved in the purchase who then worked for IPG--Steve Conafay, a senior executive, and David Whitmore, the financial officer for IPG on the transaction--told me that Powell Tate had been struggling for several years without making profits. James Fabiani, the chief operating officer of Cassidy at the time, said Powell Tate profits, strong in the mid-'90s, disappeared after 1997. Jody Powell disputed this today, March 27, saying that these were paper losses attributable to high charges for corporate overhead allocated to Powell Tate in the Cassidy companies' internal accounting. He considered these overhead payments, which he said ranged from six to 24 percent of Powell Tate's gross revenues, both unfair and meaningless, because his PR firm's "operating results" were in the black year after year.
-- Robert G. Kaiser
An overview of Gerald Cassidy's life and career.
A "cast of characters" in the life and career of Gerald Cassidy.
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