Hassles, high costs: Being public just isn’t worth it - East Valley Tribune: Business

Hassles, high costs: Being public just isn’t worth it

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Posted: Sunday, June 8, 2003 8:26 am | Updated: 2:16 pm, Thu Oct 6, 2011.

NEW YORK - Companies dove into the public market during the roaring ’90s, when it was easy to grab capital and turn investors’ heads. Now some smaller businesses are quietly retracing their steps to private life.

With share prices declining, thinly traded public companies are finding it harder than ever to attract investors, particularly institutional funds that can boost volume and pique the interest of analysts by buying large chunks of stock.

As post-Enron reforms make running a public company more complicated and costly, a growing number of businesses are deciding that the rewards no longer justify the expense and risk.

‘‘The whole point of being a public company is trying to build capital. So if you can’t have access to capital, what’s the point?’’ said David Clark, who took ready-to-eat lunch maker Pierre Foods private last year with partner James Richardson. ‘‘The market was just not playing the role for us that it was supposed to . . . and it was very expensive.’’

Clark, a former banker, spent days in New York courting analysts and fund managers in a vain attempt to energize the stock, first issued in the 1970s under the name Fresh Foods. At one point a couple analysts began covering the company but later dropped it without explanation, and the share price fell further.

‘‘We just could not get the big money guys interested in us,’’ Clark said. ‘‘I concluded all along that the only way to get the stock moving was with the institutional players. But we just weren’t their kind of company.’’

Forgotten by analysts, lightly traded and with stock prices that don’t reflect their true value, good candidates for going private are sometimes called ‘‘public company orphans.’’ They are small- to mid-cap companies that held initial public offerings during happier economic times but can no longer raise capital with their stock.

Until recently, experts say, they’ve had little incentive to go private. There were only 40 public-to-private deals in 2000, according to Thompson Financial. But last year, there were 71. There have been 29 announced so far this year, including produce leader Dole Foods, cheerleading outfitter Varsity Spirit and catalog retailer Lillian Vernon. More are expected.

One factor that can tip the scales is costs associated with the Sarbanes-Oxley Act, which became law in July following a series of corporate scandals. Aimed at making management more accountable to shareholders, it requires executives to sign off on financial statements and holds them criminally liable for inaccuracies. It also sets new guidelines for board composition and function.

Companies are paying more in audit and legal fees, and have seen the cost of insuring their directors and officers soar. With board members in short supply, many also have hired search firms to fill vacancies. The added expense can range from $750,000 to more than $1 million a year, said Ed Nusbaum, chief executive of accounting firm Grant Thornton.

A recent survey of mid-cap companies by law firm Foley & Lardner found the price of being public has nearly doubled, from about $1.3 million to $2.4 million per year.

‘‘In the past the system encouraged companies to go public,’’ said Steve Barth, a securities lawyer with Foley & Lardner’s Milwaukee office. ‘‘There were incentives to go public, there was prestige.

‘‘Now companies are saying, ‘We need to get rid of the risk, we need to get rid of the costs,’ so all of the motivations are there for going private.’’

With so many companies looking for a way out, private equity firms are


‘‘It’s the best market in history for buyouts,’’ said Peter Nolan, a managing partner at Leonard Green, a Los Angeles firm that specializes in friendly buyouts of retail companies. ‘‘It’s a terrible time to be a public company.’’

For stockholders, a buyout can be good news: Shares are often purchased at a premium over the trading price. An amicable deal also can benefit managers by increasing their stake in the surviving company.

For example, Nolan’s firm signed a $131 million deal with Varsity Spirit in April, promising investors $6.57 per share in cash — almost 40 percent more than the stock’s $4.70 trading price.

Chief executive Jeffrey Webb, a former University of Oklahoma yell-leader who founded Varsity in 1975, will keep his post, and he and other managers will hold a 15 percent stake in the new company after regulators and shareholders approve the deal.

Direct marketer Lillian Vernon went private in April in a $60 million deal with former BMG Entertainment chief Strauss Zelnick and his financial partner, Ripplewood Holdings. The agreement leaves the company’s 75-yearold founder with a 5 percent stake and a high-profile role, and turns management over to Zelnick.

Investors were paid $7.25 per share in cash, a substantial 75 percent premium over the stock’s $4.20 trading price.

Cost was a consideration for the retailer, which had stumbled through the poor economy, the anthrax mail scare and several postal hikes. But so was timing, said Vernon’s son, David Hochberg, who held a 40 percent stake with his mother before the sale. Vernon had been thinking about turning over the reins for several years, he said.

‘‘The big decision was for her to take the plunge and say ‘OK, so here’s my baby of 52 years, I’m going to sell it,’ ’’ said Hochberg, who also is the company’s vice president of public relations. ‘‘She didn’t want to sell it and walk away, she wanted to sell it to someone who she would be in partnership with, to keep the brand active and alive.’’

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