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."
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."
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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