It seemed like a good idea at the time.
After watching their stock skid from $45 a share to under $15 last fall, executives of Cort Business Services Corp. of Fairfax decided they'd had enough of being an out-of-favor small-cap company.
In March, the nationwide furniture rental company announced plans to go private in a leveraged buyout backed by Citigroup's venture capital division and a New York buyout firm, Bruckman, Rosser, Sherrill & Co.
Cort offered to buy back the shares owned by the public for $26.50 apiece -- $24 cash plus a share of a new preferred stock.
Whether that preferred stock was really worth $2.50 was the first question investors asked when they started taking a hard look at the deal. And even if it was, was $26.50 a share a fair price for the company?
The $26.50 price was almost 60 percent more than Cort stock was selling for at the time -- because Wall Street had lost interest in little, low-tech companies like Cort. But $26.50 was less than half what Cort stock had been worth only a year earlier.
Half full or half empty?
Was the management buyout offer a low-ball, bottom-feeding fleecing for investors or a better deal than they could get anywhere else?
Cort stockholders were scheduled to vote on that question this week, but on Friday the company put off the shareholder meeting until October and sweetened its offer: $25 cash and $3 worth of preferred stock.
The new offer came after two influential opponents trashed the buyout proposal.
T. Rowe Price Associates Inc., the Baltimore mutual fund manager that is Cort's second-largest stockholder, weighed in on Tuesday. Preston G. Athey, manager of the company's Small-Cap Value Fund, called the offer "inadequate given Cort's current earnings level, demonstrated growth record and leading position in its industry."
All those factors make Cort "a good company," in which Athey would like to remain a long-term shareholder. But he said he would use the 1,366,000 shares held by T. Rowe Price funds to vote against the transaction. Those shares are more than 10 percent of Cort's stock, the largest single block after the 5.8 million-share, 44 percent stake owned by Citicorp Venture Capital Ltd.
T. Rowe Price rarely goes public about its differences with the management of companies in which it invests. Of the thousands of stocks owned by its mutual funds, only one or two a year provoke public criticism, so Athey's statement alone was significant.
Cort caught more flak on Thursday when Institutional Shareholder Services of Rockville issued a lengthy report damning the deal. ISS, part of the Thomson Financial network, advises institutional investors such as pension pools and mutual funds on how to vote in corporate elections.
ISS often takes sides in corporate elections and proxy fights: Last spring it backed the management of Allied Research Corp. against a group trying to win control of the board. But it does not often get involved in merger disputes. The ISS initiative was a bad omen, but the service's analysis was devastating.
Citing "conflict of interest of officers and directors," ISS said insiders would "receive benefits from the buyout that would conflict with the interests of shareholders," including millions of dollars worth of stock, options and bonuses.
The value of the "$2.50 per share" preferred stock was also an issue for ISS. The value is based on what preferred shareholders would get if the company were liquidated, an extremely unlikely prospect. The stock won't be listed on any exchange, so there's no easy way to determine its market value. And since it won't have voting rights, shareholders have no voice in the company.
The report spelled out how Cort Chairman Charles Egan and chief executive Paul Arnold came up with the plan to do a leveraged buyout with the help of Citicorp and Bruckman, Rosser, Sherrill.
When managers propose a buyout, corporate boards usually create a special committee to provide what's supposed to be an "independent" evaluation of the offer on behalf of small investors.
Cort's directors did not bother with that fig leaf. Instead they deemed two of their own to be "disinterested directors" representing the public. One of those two was Gregory Maffei, a former vice president of Citicorp Venture Capital, which is putting up the money for the buyout.
The board also gave Cort's top executives "golden parachutes" that will benefit them if the company is sold. The compensation committee that issued the parachutes was chaired by Bruce Bruckman, head of BRS, and included board members James Urry and Michael Delaney, both of whom represent Citicorp Venture Capital.
The committee doled out management bonuses adding up to $3.5 million, the ISS report noted. "The reasons for such payments were not disclosed." Not disclosed, but of obvious benefit: They cemented management's interest to those of Citicorp and BRS.
In addition to getting cash, the Cort executives who now own less than 5 percent of the firm's stock would end up with a 16.5 percent stake after the buyout.
Combing through hundreds of pages of Securities and Exchange Commission filings, ISS spelled out other ways in which the insiders stand to benefit: Bruckman's firm would collect a $3.4 million fee the moment the deal closed and would get a $500,000 management contract. Citicorp would earn $3.4 million in dividends in the first year alone.
Analyzing the transaction from the buyout team's point of view, ISS calculated that the insiders would make an annual return of between 27.1 and 33.1 percent on their investment in Cort.
In contrast, the report noted, Cort's shareholders had earned just 8.4 percent over the previous three years, far below the average of 15 percent earned by investors in companies that were considered to be Cort's peers.
If the details of the deal didn't raise enough doubts, ISS pointed out that shareholders had a ready alternative: an offer to buy their stock for $28 cash from Brook Furniture Rental Inc. of suburban Chicago with financing from Fremont Partners, a major buyout firm.
Brook's chief financial officer, Tom Peterson, said Cort has refused to discuss its offer. "They won't talk to us, but we are still interested in pursuing the transaction."
Cort executives are looking out for their own interests, not those of stockholders, Peterson said. "It's not a fair deal. There's a better deal out there, and they are not looking at it."
On Friday, Cort executives declined to be interviewed or to respond to specific questions about the transaction. But they issued a statement saying, "We have been listening to our shareholders.
"While we believed that the previous offer was fair, we are trying to be as responsive as possible to their concerns," the company added, saying the management buyout "offers shareholders the surest route to significant value."
Whether Cort's latest offer will fly remains to be seen. Raising the bid by roughly 5 percent may not be enough to change investors' minds about the buyout, particularly since all the egregious insider goodies remain intact.
But an extra buck and a half a share is something, Athey said, and the willingness of Cort executives to respond to shareholders is a sign that corporate democracy can work. "This is the only country in the world where shareholders stand a chance to get a fair shake or a fair deal."
CAPTION: A Look at ... Cort Business Services Corp. (This graphic was not available)