Board Cuts Molina Healthcare’s Family Roots

How can families keep control after an IPO, avoiding the Molinas’ fate?

By April Hall

Molina Healthcare saw its family business roots cut last month, when Dr. J. Mario Molina and his brother John C. Molina were ousted by the board of directors from the company their father founded 30 years ago.

At a May 2 board meeting, Mario was summarily voted out as both CEO and chairman of the board, and his brother John was voted out as CFO. Both brothers remain on the board.

“I had no clue,” Joseph Molina told the

Wall Street Journal

about the vote.

When Molina Healthcare went public in 2003, the brothers neglected to take steps that would have enabled them to keep control, advisers say.

When a family business goes public, the family must view the move as far more than a way to obtain an infusion of capital. They need to decide if they want to keep control of the company and, if they do, how to do it.

There are several options available to families seeking to protect their control of a public company.

“Oftentimes, when our clients consider an IPO, it’s because they are approached by an investor,” says Fentress Seagroves Jr., a partner in the Deals practice at PwC who works with the firm’s private company and family business practices. “They may consider a sale or a divestiture, and see an IPO being an alternative to that.”

“The classic case is when companies say, ‘We’re capital restrained.’ There are so many other sources for capital for private companies now, there is less of a reason for going public,” says David Ethridge, who has worked in the equity business for 20 years and is PwC’s Deals managing director and U.S. IPO Services leader.

In the

Journal

article, Mario Molina lamented his failure to put the family’s shares into a special class. He said the family was advised during the IPO exploration to keep all shares the same in the interest of fairness.

Ethridge says if he had been in on those discussions, he would have advocated a dual-class share structure.

“I don’t know why in the case of Molina they wouldn’t go ahead and do that because it doesn’t affect the trading price,” Ethridge says. “I’m a little surprised when I read that [the Molinas were advised against a special class of stock for the family]. “

A dual-class share structure has been used primarily by business families who “look at IPO as a potentially profitable event, but [do] not want to lose control,” says Ethridge.

The structure creates two classes of shares, traditionally designated as Class A and Class B. Class A shares carry more voting rights than Class B shares. The ratio can vary — two votes to one, 10:1, 5:1, or whatever is established.

Ethridge notes that “sunset provisions” can be established, which would eliminate the dual structure if the shares held by the family fall below a certain percentage.

At the time of the IPO, the Molina family held 70% of the shares in Molina Healthcare. At the time of the brothers’ firing, they held 25%.

The Molina situation, Seagroves explains, highlights both the benefits and pitfalls of a family business going public.

“It’s important that we encourage our clients to thinking about the range of all the options,” Seagroves says. “Some remain private rather than subject themselves to a heightened scrutiny of public reporting. We ask them, ‘Where are you? What’s your strategy? Where are you going?’ ”

The reason for going public may go beyond raising capital, Seagroves says. Sometimes the family wants to broaden the investment base or attract talented managers who don’t want to work for a privately held family business.

The Molina shake-up could also have been a communication issue, Ethridge says. Once a company goes public, the shareholders and the board of directors are part of the business and must be viewed as partners. If Mario or John Molina were not keeping those partners informed and keeping lines of communication open, that could explain the surprise over the firings.

“CEOs need to look at the time commitment of informing the public partners. It should be 25% of the CEO’s operation,” Ethridge says.

On the other hand, Seagroves notes, changes made over time may have been a factor in Molina Healthcare’s situation.

It’s been 15 years since the Molina IPO, he points out. “There has been lots of execution in that time. The company is larger than it was when it went public.”

Family business owners considering an IPO should think about their range of options, Seagroves advises.

“Fast forward to planning ahead and think about the next gen changes in the business [and] changes in the market,” he says. “Think of their optimal success and [how they could] still achieve their goals as a family involved in the business.”