Considering Taking Your PUBLIC Company PRIVATE
By Karin French
March/April 2003 (Financial Executives International) The number of companies going private is increasing, just as the number of companies going public has decreased. Several compelling factors are driving the trends.
With the increased scrutiny on public companies by legislators, investors and the general public, taking a public company private isn't as farfetched as it may have been during the bull market of the 1990s. Add to the mix an uncertain Wall Street, and some public companies may want to reassess their public status, says Edward E. Nusbaum, chief executive officer of the global accounting, tax and business advisory firm Grant Thornton.
"Many of the recent regulatory changes benefit shareholders by making executives and directors more accountable," Nusbaum says. "While this is great from a shareholder's perspective, companies that are publicly traded may now face additional burdens. Most of these regulatory reform provisions are focused squarely on public companies -- while their private company counterparts do not share these same requirements."
President Bush signed the Sarbanes-Oxley Act into law in July 2002 with the hope that it would put an end to the mounting corporate scandals and accounting misdeeds in the U.S. Included in the Act are a slew of new rules regarding the structure and role of the audit committee, as well as stiff penalties for corporate wrongdoing. A public company's CEO and chief financial officer must certify that its 10-K and 10-Q filings with the Securities and Exchange Commission (SEC) "fairly present, in all material respects, the financial condition and results of operations of the issuer."
Other major provisions in the Act restrict the types of services audit firms can offer to public clients, require "independent" members on audit committees and require companies to disclose whether they have a "financial expert" on their audit committee.
"These recent regulatory developments have increased the cost of being a public company," Nusbaum says, adding that, "going private could save a company accounting and legal fees associated with SEC filings, as well as executive time."
Reducing Public Pressures
For some public companies, going private provides additional advantages by eliminating some of the pressures associated with being a public entity. One of these, according to Joshua Bushard, senior manager with Grant Thornton's Minneapolis office, is reducing the pressure to maintain growth. Also, he explains, "By going private, a company regains confidentiality because the company no longer has to disclose compensation and financial details to the public, and control is put solely in the hands of the new owners."
Manchester College accounting and finance professor Frank Olive says that some public companies decide to go private to reduce litigation risk and avoid the intense scrutiny of shareholders. "In today's fault-finding environment, companies that go from being public to private could possibly save the costs of defending themselves in litigation," he says.
Going private may be most beneficial, however, to companies that aren't currently making a profit as a public company -- but that have the potential. "If the market is not recognizing the value of the company," Bushard says, "the new owners can realize a windfall by paying a reduced price for a company that is worth more."
Finding the Right Time
In 2002, Interfoods went private in a buyout led by CEO Robert Berg and Steven Wemple, the chief operating officer. Based on a meeting with the company's business advisers, attorneys and its accounting firm, Berg decided that the time was right to buy back the shares. "All the factors suggested that it was time to consider new options for our company," Berg says.
Interfoods operates Popeyes Chicken and Biscuit franchises with 165 restaurants in Alabama, Illinois, Florida, Georgia, Louisiana, Mississippi and Missouri. Popeyes is the second-largest chicken restaurant chain in the world (in sales) and has a presence in more than 20 countries.
Berg and Wemple acquired the Interfoods shares they didn't already own by offering shareholders unsecured 10 percent notes valued at $1.45 a share. Prior to the buyout, shares were selling at around 57 cents.
Dole Food Co. Inc. -- another public company in the food industry -- recently announced plans to go private. Dole, a fruit and vegetable producer, will go private during 2003 in a deal lead by its Chief Executive David Murdock.
Murdock will acquire the 76 percent of Dole stock he and his family don't own for $1.4 billion, and the assumption of $1.1 billion of debt. The Westlake Village, Calif.-based company's board of directors approved the transaction after Murdock increased his bid to $33.50 a share from $29.50.
The SEC allows a company with fewer than 300 shareholders to de-register its securities and become a private company. This process is typically done through a merger or tender offer (TO) that reduces the number of shareholders to one.
A merger entails the filing of a proxy statement with the SEC and a vote of shareholders. A TO usually requires the filling of a "Schedule TO," which includes the offer to purchase and a letter of transmittal. Another avenue of going private is through the use of buyout firms or investment banks.
1990s IPO Bubble
Prior to the new restrictions and increased scrutiny placed on public companies by Sarbanes-Oxley, a number of companies -- mainly technology firms -- reverted back to private company status after their market valuation tumbled following a successful initial public offering (IPO). Both Agency.com and Buy.com, for example, have gone private within the last few years. Another tech firm, Seagate Technology, went private in 2000, but as of Dec. 11, 2002 has become a public company again.
"During bear markets, many smaller publicly traded companies feel that the market is inadequately valuing their company," Nusbaum says. "In many of these cases, shareholders can unlock some of this unrecognized value by going private."
Going private isn't becoming the norm, however, according to data from Thomson Financial. Only 39 public companies announced plans to go private in 2002. That number isn't much more than the 26 companies who completed reverse-IPOs in 2001, and still not as high as the 46 in 2000. Conversely, Thomson data shows that there were 97 traditional IPOs in 2002 -- a number barely lower than the 107 in 2001. This contrasts sharply with the 392 U.S.-based companies that opted to go public in 2000.
Nusbaum expresses surprise that more companies aren't going private, since "with the public markets in disarray, the benefits of being a public company certainly have diminished for some small and mid-sized companies."
Perhaps this is due to the potential pitfalls. Once a company decides to go back to private company status, the first issue, of course, is funding.
"Companies considering going private have to pay for the services of bankers, attorneys, and accountants," Bushard says. "This is on top of coming up with the capital to buy out the investors. In some cases, this capital may be more expensive than the cost of the capital as a public company."
Steven Snider, a senior partner with the Boston-based law firm Hale and Dorr, says that large pools of capital are currently available for going-private transactions due to relatively low interest rates. "Fortunes have been made over the last 30 years in going-private transactions," he says, while cautioning that a company seeking financing must have a positive cash flow and strong financial controls in place.
In addition to funding, companies considering going private can't discount the potential human resources impact. Without stock options available to them, private companies need to create inventive ways to attract and retain quality employees. Conversely, during a period of falling stock prices, stock options can become worthless, and public companies cannot rely on options to keep their employees happy.
"There are boundless ways for employers to motivate their people," says Paul Lehman, vice president of Winning Workplaces, a not-for-profit organization dedicated to helping small- and mid-sized businesses create innovative, comprehensive business environments. "Employers just have to be willing to do it, and do it consistently."
As the past president of Fel-Pro Inc., a family-held auto parts manufacturer, Lehman looked for other ways to motivate employees other than offering stock options. By giving employees positions of leadership, financial incentives built on individual and company goals and public recognition for a job well done, his company had outstanding financial performance and found national recognition for its innovative people practices.
Lehman argues that another benefit of working at a private organization is that employees can avoid unproductive worrying about the volatility of the company's stock price. "In today's environment," he says, "I really don't see many downsides to being a private company."
Public -- or Private? Exploring the Possibilities
KARIN FRENCH, Partner in Charge of SEC Regulations for Grant Thornton LLP, (email@example.com) focuses on accounting and reporting issues affecting public companies. Grant Thornton (www.grantthornton.com) is a global accounting, tax and business advisory firm dedicated to serving the needs of middle-market companies.
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