NEW YORK (CNN/Money) – In the late 1990s, it seemed that the goal of every private company was to cash in on a lucrative initial public offering. Oh, how the times have changed.
The flow of IPOs has slowed to an almost imperceptible trickle. But even more telling is that some public companies may be starting to realize that being private might be preferable to having a listing on the stock market.
Investors' hyper-awareness of accounting practices and concerns about corporate fraud have caused many stocks to plummet this year. Then there's the constant pressure to meet quarterly earnings forecasts, a process that often makes long-term business plans difficult to execute. These days, patience is a virtue that few investors seem to have. All that adds up to an increased willingness to go private.
"Managements are saying 'I can get access to money and won't have the headaches of being public,' "says Grant Garbers, managing director of mergers & acquisitions for Roth Capital, an investment bank focusing on small-cap companies.
Martha going private?
To that end, there have been rumors in recent weeks that two prominent public companies, Martha Stewart Living Omnimedia and Charter Communications, the cable company controlled by Microsoft co-founder Paul Allen, are considering going private. A spokesman for Martha Stewart Living would not comment about the speculation. Charter Communications did not return a call for comment.
In addition, several smaller companies have decided to go the private route in recent months. Herbalife, a maker of nutritional supplements, was taken private by a partnership that included a venture capital firm, private equity group and members of management on July 31.
Dave & Buster's, which operates a chain of restaurant/arcades, is in the process of being bought out in a management-led deal. And the chairman of chemical and mineral manufacturer International Specialty Products offered to buy the 20 percent of the company that he didn't own in order to take it private. Similar deals are expected in the near future.
"In an era where there's much greater scrutiny on public filings and the stock price is low enough to be attractive to a majority or significant shareholders, you're going to see companies being taken private," says Morton Pierce, chairman of the mergers & acquisitions practice at Dewey Ballantine, a law firm.
Garbers says his firm is currently working with two public firms that are looking to go private, one through a management-led buyout and the other through a sale to a private equity firm.
Buying stock at a premium
What does this mean for the average investor? While going private might sound like an admission of defeat by a company -- yet another negative market trend -- it might actually be a somewhat bullish indicator. "This is a sign that executives are basically calling their shares undervalued," says John Orrico, manager of the Arbitrage Fund, a mutual fund that invests in takeover situations.
| * Herbalife deal closed on July 31. Remaining deals have yet to close. | | Sources: Thomson Financial, CNN/Money |
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Herbalife went private at a price that was 30 percent higher than where the stock was trading before the buyout was announced. Orrico owned Herbalife in his fund before it went private. Shareholders of Dave & Buster's will receive a cash payment that values shares at a 27.5 percent premium to the price before the buyout. And the chairman of International Specialty Products is offering to take the company private at $10 a share, a 26 percent premium to the stock's price before the offer.
Orrico says that he also thinks more public companies will seek to go private and that the most likely candidates are companies with a high level of insider ownership, a weak stock price and an attractive balance sheet. The latter would it make it easier for a leveraged buyout (LBO) firms to take a company private. In an LBO, the buyer takes on a lot of debt to make the purchase.
Nobody is predicting a return to the "Barbarians at the Gate" style of LBO craziness associated with the 1980s but Garbers says that the prolonged bear market has created some compelling buying opportunities for LBO firms. "Private equity groups have a high degree of interest in these types of deals and they are all pretty flush with cash right now," he says.
Still, while few doubt that more companies are looking to go private, there is concern that larger companies won't be able to afford to do so.
Joe Doloboff, partner and director of Ernst & Young National Office West, says that banks are less willing to make big corporate loans these days. For that reason, he doubts that too many large cap companies will actually go private because it will be difficult for management or a private equity firm to raise enough money to buy out shares owned by the public.
"The spirit's willing but the flesh is weak," Doloboff says.
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