Off the Street

Stricter rules and wary investors are prompting more companies to exit the public markets.

Not Exactly a Private Matter

Still, going private is no easy task. The classic method is for the company to merge — if shareholders approve — with a private acquisition company created by management and their financial backers (for other methods, see “Tender Squeezes,” right). Yet the same fear and loathing that is driving some companies off Wall Street has made their boards extremely wary of such management buyouts.

Moreover, the duty of boards to maximize shareholder value ensures a tug of war over price. Private equity firms like to buy at multiples of 6 to 10 times cash flow, says LeClaire, but public boards think in terms of premium to stock price. That, says Roger Kafker, managing director of Boston-based private equity firm TA Associates, is difficult for directors who fondly recall the 52-week high of their stock. “Many boards are still reluctant to believe the good old days aren’t coming back,” he says.

The difficulty of holding bank financing together during the six to nine months this process can take is one reason many deals fall through. That’s ironic, because once the decision to go private is made, companies enjoy ample access to capital to make it happen. The overhang in the private equity market is so large that it can help make up for the relative dearth of debt financing, says LeClaire. “No longer is being a public company the best venue from which to obtain capital,” says Kafker.

Indeed, Larson believes the relative cost and availability of private equity is yet another variable CFOs should include in calculating the cost of remaining public.

The Tyranny of the Quarter

By far the best thing about getting such a deal done, according to those who have done one, is that private equity frees companies from the market’s relentless focus on quarterly earnings. The universal corporate irritation caused by such a short-term focus was underscored recently when a handful of large public companies — McDonald’s and Coca-Cola among them — announced they would no longer provide quarterly guidance.

“The Coca-Colas of the world can decide not to give guidance anymore, but if Comp Benefits was a public company, we wouldn’t have that luxury,” notes CEO David Klock, who took that company private in the summer of 1999. Not only does the market demand guidance from companies without Coke’s clout, he says, but it has zero tolerance for any expenditure that isn’t instantly accretive. “I am glad we are private,” says Klock, “not because of governance issues, but because of the ability to make investments that may take two or three quarters to give a good return. That’s difficult to do as a public company.”

The benefits of a longer-term focus can also be seen in the February acquisition of Dallas-based Monarch Dental Corp. — a public company — by privately held Bright Now Dental Inc., of Santa Ana, California. Both companies started as rollups of private dental-practice management firms, a red-hot stock sector in the late 1990s. Bulging with pricey new acquisitions and highly leveraged, Monarch went public just before that sector tanked. Bright Now, about the same size, chose to stay private, says CFO Brad Schmidt.

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