MidMarketMaven: Going Private Archives

Going Private Archives, Page 1 of 1
« Previous 1 Next »

Nov14	10 Reasons to Go Private: Summary Devin Thorpe November 14, 2006 Know More: Going Private, Investment Banking, Going Private Over the last few months, I've posted ten reasons for small public companies to go private. Some of these reasons are so compelling that large companies are going private in remarkable numbers. For smaller businesses in today's regulatory and market environment, I contend that it makes no sense to be public. I frankly hope that the regulatory and market environment will change, making it reasonable for real, profitable, but smaller businesses to go public. So, here's a summary of my ten reasons with links to the original posts: Valuation Corporate Governance Access to Capital Control Liquidity Recruiting Auditing Scandal Scale Strategy Golf So, what do you think? Posted at 10:44 PM \| Permalink \| Comments (2)
Nov13	10th Reason to Go Private: Golf Devin Thorpe November 13, 2006 Know More: Going Private, Investment Banking, Going Private The tenth reason to go or remain private is golf. Yes, golf. And bonuses. If you are spending less time on regulatory compliance, among other things you can do with your time is golf. If you are spending less money on regulatory compliance, among other things you can do with your money is pay bonuses to key employees like, I dunno, yourself. I don't wish to suggest that you can or should abuse executive privileges for your own benefit in a private company; I do wish to suggest that your private company board should reward you generously for increasing profits by going private. Posted at 10:41 PM \| Permalink \| Comments (0)
Nov 7	9th Reason to Go Private: Strategy Devin Thorpe November 7, 2006 Know More: Going Private, Investment Banking, Going Private The ninth reason to go or remain private is strategy. As a public company the administrative burdens of being public steal resources away from strategic initiatives and the market's focus on quarterly results give the company no breathing room. The resources a company needs to focus energy on strategy include money and time; being public is effectively a tax on both resources as senior management is forced to focus on compliance with public reporting requirements and financial resources are devoted to attorneys and accountants. At the same time that earnings are pressured by costs of being public, the public markets are focusing on quarterly results. The public markets, not without good reason, are so focused on quarterly results that a company can report solid profits and still see its stock tank if the results were not as good as expected. This short term focus puts pressure on management to defer long-term expense investments for the sake of the current quarter's profits, ultimately hurting the company's long-term prospects. Continue Reading Posted at 10:42 PM \| Permalink \| Comments (0)
Nov 1	8th Reason to Go Private: Scandal Scale Devin Thorpe November 1, 2006 Know More: Going Private, Investment Banking, Going Private The eighth reason to go or remain private is to avoid the increased scandal scale associated with being public. In a recent opinion piece, entitled "Regulation, Yes. Strangulation, No," for the Wall Street Journal, Maurice R. "Hank" Greenberg, former Chairman of AIG, wrote: In today's environment, the mere threat of an embarrassing lawsuit or the public release of potentially damaging charges -- regardless of veracity -- can throw management off its game for months, even years. As a result, CEOs of public corporations are losing their appetite for risk. To this challenge, I would add the increased risk of a scandal resulting from a failure to comply with increasingly strident regulations. Hence, firms wishing to handle problems in private and to avoid having their names printed in the media associated with scandal, should consider strategies that allow them to get or remain private. Posted at 8:11 PM \| Permalink \| Comments (0)
Oct18	Seventh Reason to Go Private: Easier Audits Devin Thorpe October 18, 2006 Know More: Going Private, Investment Banking, Going Private The seventh reason to go or remain private is easier audits. In a public company, not only is a "404" systems audit required, but other standards tend to be higher. In contrast, if your company is private and planning to stay that way, there are a variety of standards that are implicitly or even explicitly easier. In fact, if you run a family business with no outside shareholders with little or no debt, you may not need an audit at all. On the other hand, if your private business hopes to go public or to be acquired by a public company, the audit standards quickly approach those of public companies. Posted at 7:58 PM \| Permalink \| Comments (0)
Oct11	Sixth Reason to Go Private: Recruiting Devin Thorpe October 11, 2006 Know More: Going Private, Investment Banking, Going Private The sixth reason to go or remain private is to improve recruiting. The question of public or private impacts recruiting in four areas: Options: Options are effectively more expensive to grant in public companies because the users of financial statements have more focus on reported earnings per share than private shareholders, who are typically connected to management in one way or another. Cash Compensation: Remembering that all else equal, private companies tend to be more profitable than public companies because of regulatory expenses avoided, there is more cash for salary and bonus. Focus: Because recruits in a private company will be subject to less regulatory scrutiny, there is an opportunity to focus more on the mission of the position. Scandal Aversion: Being a public company creates the risk of scandal because there are so many more rules to follow; failing to follow the regulations can create a scandal. Once a scandal occurs, a public company will receive much more media attention than a private one. Hence, managers who wish to avoid scandal, seek private companies. Again, the scales lean toward private over public, especially for small companies. As companies get larger and can support more legal and compliance related staff, the benefits of private over public become effectively smaller. Posted at 9:43 PM \| Permalink \| Comments (0)
Oct 9	Fifth Reason to Go Private: Liquidity Devin Thorpe October 9, 2006 Know More: Going Private, Investment Banking, Private Equity, raising capital, raising capital The fifth reason to go or remain private is liquidity. OK. I'm cheating a bit. Shareholder liquidity is often greater in public companies, but there are more and more ways to get liquidity in private companies. Private company shareholders can access cash through dividends funded by: Traditional bank debt Mezzanine debt Private equity transactions Private party transactions with other key employees can also provide limited amounts of liquidity. Remember, too, public company insiders may be locked up following an IPO, and may be limited under rule 144 as to number of shares that can be sold, and may be limited by insider trading limitations. In other words, insiders in a public company have little more liquidity than shareholders in a private one. Posted at 7:29 PM \| Permalink \| Comments (0)
Oct 4	Fourth Reason to Go Private: Control Devin Thorpe October 4, 2006 Know More: Going Private, Investment Banking, Going Private The fourth reason to go or remain private is control. In public companies, the required structure of a Board of Directors now requires a majority of independent members. Compensation and audit committees must be fully independent. These are appropriate structures for public companies, but completely unnecessary in many private companies. In private companies, the Board of Directors is frequently and appropriately dominated by management. The owners are the managers and the managers are the directors. Auditors also are required to complete tests in public companies that are not required in private ones. Even though as a private company it is wise to get an independent audit, the standards, frankly, are appropriately more bearable in a private company. Many of the public company standards are intended to protect minority shareholders. In a private company, many of the minority shareholders are employees, friends and family and, while they need protection, they have a natural ability to protect themselves by virtue of their roles and relationships. In a closely held or family business, some of the audit's traditional benefits are completely irrelevant. Posted at 10:43 PM \| Permalink \| Comments (0)
Oct 2	Third Reason to Go Private: Access To Capital Devin Thorpe October 2, 2006 Know More: Going Private, Investment Banking, Mezzanine Debt, Private Equity, Raising Money, Senior Debt, Venture Capital, Going Private The third reason to go or remain private is access to capital. This axiom applies to the smallest companies among those that are or are seeking to go public. In broad strokes, it applies less to companies with more than $100 million in revenue and increasingly more as a company's revenue drops further below $100 million. There are many in the business of facilitating small IPOs and reverse mergers that would suggest that one of the reasons to go public to improve access to capital. Our experience would suggest the opposite. The smallest public companies have very limited access to capital and would actually have an easier time raising money in the private markets--where many investors will not even consider public companies. The capital available to the smallest public companies is often much more expensive than venture capital or other capital available to private companies. The typical features of such rounds of capital include floating conversion features that allow investors to convert debt or equity into an infinite number of common shares. This can virtually assure the investor of recovering all of its money, but at the expense of all of the other investors--and managers. Small public financings also tend to feature more up front fees, often paid in equity--subtly but meaningfully increasing the cost of financing. While I hate to harp on the costs of being public, but at the risk of redundancy, I'll note again that the costs of being public often reduce or eliminate profitability, which reduces or eliminates a small public company's access to debt capital. In contrast, the private equity markets are flush with cash. Venture funds are looking for more good deals, private equity groups are actively working to take good, undervalued public companies private, and even hedge funds are dabbling in private company transactions. Bottom line: for small, growing companies, private is the place to be for raising capital. Posted at 10:13 PM \| Permalink \| Comments (0)
Sep28	Second Reason to Go Private: Corporate Governance Devin Thorpe September 28, 2006 Know More: Going Private, Investment Banking, Sarbanes-Oxely, Going Private In short, the second reason to go or remain private is two names: Sarbanes-Oxley. This law, which creates huge burdens for public companies, fundamentally changes the economics of being public. Without suggesting that this is a complete list, the law requires the following: Whistle-blowing: the law requires that public companies create a process for employees to alert an independent member of the board of directors to any concerns Officer Certifications: CEOs and CFOs are now required to to certify, subject to civil and criminal penalties, that the financial statements are properly stated Internal Controls and Audits: the law set out new standards for internal controls and audits 404 Audits: section 404 of the law requires a thorough audit of the financial system and controls, typically at very high costs Ban on loans to officers: the law also bans loans to officers Independent Board Members: the law requires a majority of independent board members for most companies Independent Audit Committees: the law also creates standards for the audit committee, including a strict definition for financial experts serving on the committee It is important to note that these burdens are just the new burdens. A public company has traditionally needed to have independent audits, provide quarterly and annual reports and to comply with a host of SEC regulations that were challenging before Sarbanes Oxley. Simpler corporate governance is a big reason to go or remain private. Posted at 7:07 PM \| Permalink \| Comments (1)
Sep25	First Reason for Going Private Devin Thorpe September 25, 2006 Know More: Going Private, Investment Banking, Selling a Business, Going Private There is a myth among those who promote reverse mergers and such that valutions are much higher for public companies than for private ones. While this is true across all industries, it is largely a function of natural selection. Companies that are worth more, go public. When all else is equal, however, valuations in the current marketplace among private and public companies vary little (when comparing public companies to private companies in M&A transactions). Our data suggests a variation of just 10 to 20% between comparable public companies and private companies involved in M&A transaction. What's more, public companies aren't always worth more. Note, too, that all else typically isn't equal between public and private companies. If two otherwise identical companies exist, the public company is likely to be less profitable because of the costs associated with complying with the regulations that govern public companies. Hence, for small companies, it seems that remaining or going private makes the most sense. How small? Let's just say, the smaller the truer this is. Posted at 8:36 PM \| Permalink \| Comments (0)