In the heyday of the dot-com explosion, companies rushed to hold initial public offerings (IPOs), taking advantage of the belief that Internet companies were virtual gold mines just waiting to be harvested.
Now, as the Nasdaq issues one warning after another to companies that have not kept their per-share stock values above a US$1 minimum, some dot-coms have considered returning to their private roots before being relegated to the oft-ignored “pink sheets” of over-the-counter (OTC) trading.
However, taking a company private in order to save it is about as easy as jumping from the top of a burning skyscraper into a fireman’s net. They are both desperate moves, requiring precision, faith and luck.
Once a decision is made to take a company private, the biggest challenge is to raise the funds required to purchase the minority shareholders’ stock, according to Matt Foster, a Tampa, Florida-based partner with the law firm of Foley & Lardner.
Companies that are successful and are able to offer minority stockholders a premium price for their shares are in a good position, Foster told the E-Commerce Times, because the risk of shareholder lawsuits is decreased.
“[Shareholders] would be less likely to sue after receiving a price above market,” Foster said.
Beware the Red
Where companies find the money is important, according to Morningstar.com analyst David Kathman.
“In the 1980s, a lot of companies went private through leveraged buyouts, where an investor borrowed the money to buy out the stockholders, then slashed costs in an effort to save money,” Kathman told the E-Commerce Times.
“These leveraged buyouts were mostly not good for the companies’ long-term health, since they left the companies with lots of onerous debt,” Kathman said. “This illustrates why it’s usually not a good idea to borrow the money that it costs to go private.”
Although Foster said that going private is a complicated procedure, he added that it does not take very long to close. A transaction accomplished through a merger could take as little as six weeks to complete, and a transaction involving a tender offer could be done in four weeks, the attorney said.
Both types of transactions require the approval of shareholders and filings with the U.S. Securities and Exchange Commission.
Once the deal is done, according to Foster, “the minority receive cash for their shares in a taxable transaction. The majority become sole owners of the company.”
Dot-coms have few role models on the road to privatization. Neither Kathman nor Foster could cite a pure-play e-commerce company that had gone private.
However, brick-and-click merchant Petco, one of the last online pet suppliers left standing, went private last October after merging with BD Recapitalization.
As a privately held company, Petco is not required to issue financial statements, but the company did muster enough cash to gobble up the assets of Petopia in December for an undisclosed sum.
Weighing the Options
Kathman and Foster agree that privately held companies can benefit from facing less public scrutiny than publicly owned corporations.
“Probably the biggest advantage to going private is that a private company doesn’t have to worry as much about short-term quarterly results, and can do what it needs to do for the long-term good of the company,” Kathman said.
On the other hand, companies that have gone private no longer have access to funds available through the capital markets, and get much less brand recognition than publicly held corporations.
Ultimately, the time to go private is still before a company receives a delisting notice, so that it “would make the delisting look voluntary rather than mandatory,” Foster said.
“Some companies with good cash flows, but unfairly low market caps, could probably use going private as a way to deliver value to the minority shareholders being [bought out], as well as insiders or the majority shareholder staying in who reaps the benefit of the strong cash flows,” Foster said.
However, those companies that have already received delisting notices from the Nasdaq, such as Webvan and Amazon-backed Ashford.com, are probably too cash poor to change their fortunes by going private.
“I really don’t see going private as a cure for a weak company without cash flows,” Foster said. “It does makes sense for companies with strong cash flows that are in the penalty box.”