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Things Fall Apart

Rebecca Boenigk, Neutral Posture, and a Crummy IPO

Comic Book Case Study

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NOTES Page 1

An Air Force veteran who conducted 213 combat missions, Dr. Jerome Congleton had a lengthy career in industrial engineering, founding the Ergonomics Center at Texas A&M University. As the first person to design a chair with adjustable armrests, contoured seats, and adjustable lumbar, he’s known as the father of office ergonomics. Neutral Posture innovated by prioritizing ergonomics at a time when most chair makers prioritized aesthetics (showcasing an executive, elegant look and high-end construction material). The original Neutral Posture chair reduced pressure on muscles and joints and was customized to each customer. Rebecca says, “We manufacture the most ergonomic chairs on the market.”

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Rebecca’s mother, Jaye Congleton, was co-founder, EVP of product development, secretary, and director. In its Oct. 21, 1997 IPO, Neutral Posture raised $8M (=$14M in 2021) for acquisitions, to grow sales, expand product offerings, and gain market share. Neutral Posture competes in the seating segment of the “Office Furniture (No Wood)” market. In 1997, this $3B market segment was growing about 9% annually. Neutral Posture had <.5% of the market. Rebecca and Jaye retained >50 percent of the shares post-IPO, which made the company woman-owned. Further, women held four of the seven board seats (Rebecca, Jaye, and two more board members). According to Business Insider, about 20 public companies in history have had female founders in leadership roles at time of IPO, but those companies had previously raised venture capital (from largely male venture capital investors), which diluted the female founders’ ownership stake to <50%, making them not woman-owned. They also did not have a female-majority board.

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After the company went public, Jaye ceded her operating role because one IPO underwriter didn’t think the appearance of a mother-daughter business would make for good IPO optics.

Shortly post-IPO, Neutral Posture heard about an opportunity to buy the assets of a bankrupt company. Rebecca won the auction with a bid of $740,000. She told Braun Ink, “When I told my board excitedly that we had made this acquisition of the product line and hired two of its top people to move to Texas and work with us, the board chastised me like a little kid. They told me I didn’t have the authority to make the acquisition because I hadn’t gone for approval. I said, ‘I’ve already written a check.’” After this episode, Rebecca thought to herself, Decisive action has made us successful. Is that no longer allowed? In late 1998/early 1999, the board spent $400K on a consultant to look at Neutral Posture inefficiencies. Rebecca told Braun Ink the board expected the consultancy would prove Rebecca’s ineptness so the board could have her terminated. “When we went public, I was 34. They thought I was young and inexperienced and [the president], who was older, was really running things.” Instead, the consultancy informed the board that the president was causing the problems and Rebecca was a skilled leader. The president departed, but the fact that the board needed a consultancy to tell board members what she already knew infuriated Rebecca. During and after this episode, no love was lost between outside board members and Rebecca. Federal securities laws require public companies to word forward-looking statements and investor guidance very carefully. Incorrect/incomplete projections can leave companies open to liability. Rebecca said, “One thing people don’t realize is that every press release had to be so careful, because if we say anything forward-looking (e.g., that we’re going to grow sales by a certain percentage), if that didn’t happen, then we could get shareholder lawsuits.” –5–

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Neutral Posture always allowed office workers to wear T-shirts to work except on days when there was a visitor, when collared shirts were in order. Rebecca thought that since the company always had ample notice of visitors, the uniform mandate made no sense.

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Other issues with being a public company included that a) Neutral Posture was at odds with market trends in 1997, the IPO year—essentially the same year that stock markets began the meteoric rise that became known as the dot-com bubble. Being a furniture manufacturing company that didn’t sell or distribute online was a distinct negative, b) the board did not approve a 401k for employees, stating that a 401k plan wasn’t in shareholders’ interest. Rebecca felt a 401K was a key benefit that attracted and retained employees, and c) the board reportedly didn’t want Neutral Posture to develop and introduce new products. This dissatisfied Rebecca. “I’m an entrepreneur. It’s really important to develop products, but the board thought we were overextended already.” The stock price sank after the IPO, eventually hitting $1 per share. In August, 1999, NASDAQ transferred the stock over to its small cap exchange and told the company it risked being delisted. Rebecca found little upside to being publicly traded. “Within two years of going public, I reached the point where out of stress I cried for days before every board meeting,” she said. Neutral Posture had become a corporate orphan—a company with minimal public float, minimal investment bank coverage, sparse trading volume, and very few institutional investors. Accordingly, the stock price didn’t reflect the value of the business and the company’s intrinsic value exceeded its public market cap. Rebecca estimated public-company compliance & reporting requirements (auditors, lawyers, etc.) cost $350K per year. Rebecca chose to work with corporate counsel that specialized in mergers & acquisitions. For purposes of this comic book, the name and likeness of counsel have been changed.

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Michael Turner (pseudonymous counsel) advised Rebecca that going private is risky. Numerous companies have successfully gone private through management buyouts (e.g., Dell, Safeway), but those are larger companies with access to a sophisticated private equity sponsor. Smaller companies that don’t use PE sponsors are rolling the dice as to whether they can successfully pull off a go-private management buyout. Here’s a short list of general reasons (i.e., not related to Neutral Posture specifically) not to go private: 1) Uncertainty—an announcement signals the market that a company is for sale and, to maximize value, a corporate auction may be required. The outcome of an auction, including control, is uncertain. 2) Instability—Being “in play” is time-consuming. It creates an unstable operating environment; disconcerts customers, employees, and business partners; and creates an opportunity for competitors to poach employees and accounts. 3) Perception—Public companies are more prestigious and have better access to cash (more staying power and financial substance) and are viewed as being less risky. 4) Cost—Going private comes with significant transaction costs and litigation risks and is subject to big legal and regulatory requirements. The deals are sophisticated and complex. It usually involves company counsel, counsel for the sponsor, counsel for the independent committee, and an investment banker. Board members and management are frequently on several sides of a proposed transaction. 5) Legal—Management buyouts are considered by some to be a (legal) form of “insider trading” because of the asymmetries in information—management knows more than anyone about the pros and cons of the company and so may have an advantage in pricing the deal. Shareholder class action lawsuits are not uncommon. 6) Pride—Going private can be seen as a failure. –6–

Things Fall Apart Rebecca Boenigk, Neutral Posture, and a Crummy IPO

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Rebecca Boenigk and her mother, Jaye, start Neutral Posture, a cutting-edge office furniture company, in a Texas garage in the 1990s. They bootstrap it into a multi-million-dollar company, but after Neutral Posture goes public in 1997, things begin to fall apart. A disagreeable co-executive, board members who Rebecca feels micromanage her every move, and lack of Wall Street analyst coverage are only the beginning of Rebecca’s problems. The company’s stock price begins to trade at below book value, and Rebecca doesn’t see eye to eye with board members. Should she undertake a risky and possibly litigious go-private transaction, or should she try to fix Neutral Posture’s public problems?

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