Deciding to go private is just the beginning. Once you've
made the decision, the buyout team--typically the founder, the
management team or, in a family-run company, the family
members--must seek out an equity firm willing to finance the
transaction and put together an appropriate offer for shareholders.
While that may sound straightforward enough, both tasks are fraught
with risk.
"When you're working with an equity firm to take a
company private, it's a marriage," says Bergmann, who
advises seeking a firm with a solid reputation and checking its
references. "You want a partner that is like-minded in terms
of goals for the business and can improve your chances of
success."
Once the board sees the buyout proposal, a special committee is
formed to represent the interests of shareholders and bring in an
outside firm to evaluate the offer. "That's where the
deal-making comes into play," says Ainsworth, who notes that
at this point, management, long accustomed to defending a
company's worth, is thrust into the opposite role.
"Suddenly, they are trying to tell us why the price should be
less, whereas when they took our money, they were always trying to
tell us why the price should be more."
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In this critical phase of the process, a buyout team that fails
to tread carefully will find itself out of luck. "You can err
both ways," points out Bergmann. "If you determine a
buyout price by putting together an aggressive set of projections,
you will have paid too much. While it's bad to be a public
company trading poorly that may not have a lot of debt, it's
even worse to be a private company with lots of debt that's
performing poorly."
Too conservative an offer can be equally damaging. "Once
you put the company into play, if the equity sponsor can't get
to an acceptable price, it may come back and say 'We can't
accept this price, but we've already done all this work, so
let's find another buyer,' " says Ainsworth. The
result? The original buyout team finds itself outbid.
But the rewards of successfully going private can be worth
risking such an unsavory fate. Just ask Bob Johnson, 55, the
founder of media firm BET Holdings. Disillusioned with the
public's valuation of BET after its 1991 IPO, Johnson took his
company private in 1998 at a $1.2 billion valuation. In 2000,
Johnson sold his 63 percent of the company to Viacom Inc. for a
whopping $2.3 billion, which he dubbed a "tremendous
return" on his three-year investment. You can't argue with
that.
Jennifer Pellet is a
freelance writer in New York City specializing in business and
finance.
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