VideoThese days, John Henderson thinks of himself as a brewer. That's not to say the former CFO of Genesee Corp. actually brews beer: "We have talented guys who take care of that," he notes. But ever since Henderson and two other executives orchestrated a management buyout, turning the company's Rochester, New York-based brewing operation into a private entity, he has finally been able to focus entirely on the business of making and selling suds.
Dealing with the requirements of being public "took an awful lot more time than I expected," recalls Henderson, now COO (he shares the CFO duties with the CEO) of High Falls Brewing Co. And while the brewery is still managed as if it were a public company, he says it's "a huge relief" not to have to comply with securities regulations. "I'm thankful that resources can be directed at managing the day-to-day [operations], not complying for compliance's sake," he says. By contrast, the all-but-empty shell of Genesee, which disposed of its three main business units as part of a planned liquidation, was still filing Securities and Exchange Commission documents as late as April, more than two years after High Falls was created to buy out the brewery for $22 million.
Henderson isn't the only one who's relieved. While most companies aren't choosing High Falls's particular method of "going private" — an asset disposition rather than a merger or tender offer — they are leaving the public markets in increasing numbers. In fact, according to Mergerstat, going-private transactions have risen steadily, from 197 in 2000 to 316 in 2002, with 93 announced as of April 1.
Their reasons for exiting differ greatly from those of spurned not-coms -- industrial companies that couldn't compete for equity dollars during the Internet bubble. Today, onerous regulations, depressed stock prices, and investor hostility are sparking a wider withdrawal.
Small-cap companies account for the majority of these transactions, but companies of all sizes have been stepping off Wall Street. The most prominent recent example is $4.4 billion Dole Food Co., in Westlake Village, California, whose chairman and CEO, David H. Murdock, cited "the short-term pressures and constraints of the public equities market" as reasons for taking the company private in late March.
Apparently, those same constraints are leading many more companies to wonder if they can do better without the market looking over their shoulder — or giving them the cold shoulder, as the case may be. Says Richard Kline of Houlihan Lokey Howard & Zukin: "There is a gestation period for these deals, but the inquiry level has increased significantly."
Stepping Out
Fueling this newest exodus from the public market, in part, are the onerous regulations embodied in the Sarbanes-Oxley Act of 2002. Recent filings with the SEC clearly illustrate that the new legislation drove many companies out even before the rules were finalized.
In one example, in an SC13e3 filing (the SEC form for reporting going-private transactions) on March 4, Tampa-based Coast Dental Services Inc. complained that the management time and resources devoted to compiling and distributing annual and quarterly reports "are considerable and will likely increase significantly in the future as a result of the [act]."
Similarly, Greenville, Tennessee-based Landair Transport Inc., a $106 million (2001 revenues) firm bought out by its founder and the COO in March, specifically cited the increased costs of complying with both Sarbanes-Oxley and the rules adopted by the National Association of Securities Dealers, adding that "such increased regulation would place additional burdens on management that would further distract them from managing the business operations of Landair."
A backlash against such additional burdens is not surprising. "The intersection of all this stuff — more disclosures, more internal controls, and a stronger audit committee — is frequently in the CFO's office," observes Stephen D. Poss, an attorney with Boston-based Goodwin Procter LLP, who adds that another word for intersection is "crosshairs." For smaller public companies, where the CFO is sometimes a one-man finance department, the new regulations, certifications, and the spectacle of finance chiefs doing perp walks may be a powerful deterrent to staying public.
Or perhaps there is a deliberate effort to scare companies away from the public markets. "I wouldn't be surprised if someone at the SEC is thinking, ÔWe need to make being a public company so expensive and onerous that we get these smaller companies off the screen,'" says Poss. "And that's not necessarily a dumb way of thinking."
Market Correction?
What Poss and others suggest, and depressed stock prices seem to confirm, is that the trend toward going private is actually an appropriate market correction. "At the height of the bull market, there were approximately 18,000 publicly traded companies," declares Scott Larson, assistant professor at the business school of Chicago's National-Louis University. "Investors threw money at certain segments of the public equity markets at unsustainable levels, so the implied cost of equity in the more-speculative segments of the market dropped to near zero."
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