At the tail end of an era that spawned the term "IPO envy," opting out of the public sphere may seem inconceivable. Look again. In the right circumstances, going private can be a smart move.
"In the public markets, companies that are less than $1 billion in market cap often get lost in the shuffle," explains Robert Bergmann, managing director of Los Angeles-based private equity firm Centre Partners Management LLC. "[If] they have an earnings hiccup, all the institutional investors flee the stock. Going private can offer a number of advantages vs. being in that drifting situation."
In fact, such entrepreneurial companies as BET Holdings II Inc., Mary Kay Inc. and Seagate Technology Inc. have gone the start-up-to-public-to-private route. Yet taking a company private is both risky and complicated. Several conditions should be met before you consider such a move, says Ron Ainsworth, president of Costa Mesa, California-based Trenwith LLC, the investment banking subsidiary of BDO Seidman LLP, who points to several areas his firm looks at when consulting with companies considering the move.
"Obviously, you need to have a depressed share price, because [otherwise] there's no rationale to go private," says Ainsworth. "After that, you look for three things: a lack of shareholder liquidity, few analysts covering the stock, and no access to public capital--meaning no ability for another round of financing."
In addition, Ainsworth advises considering the overall health of the industry and the financial impact of remaining public. "In many cases, the industry sector is in the toilet," he says. "Then if you look at the SEC reporting requirements, the costs and liabilities of being public can be prohibitive."