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More Companies Find It's Better to Go Private

Regulatory scrutiny and high costs of being in the public market are driving many firms to consider a way out.

May 27, 2003|Josh Friedman | Times Staff Writer

Larry Tanning knows what it's like to enjoy Wall Street's favor. After taking his computer-systems design firm public in 1999 at $15 a share, he saw the price top $70 within seven months, giving the company a market value of more than $1.4 billion.

But over the last three years, Wall Street has virtually turned its back on Denver-based Tanning Technology Corp. Like many other tech firms, its shares are worth mere pennies.

For Larry Tanning, the public market no longer holds much allure. So he's turning his back on it -- by going private.

"There's no question we're now in a business cycle where being private makes more sense than being public," said Tanning, whose 10-year-old company agreed in April to be acquired by Los Angeles investment firm Platinum Equity for $24 million.

"The cost of all the needed public disclosure, reporting and auditing has become way too expensive for us."

Many entrepreneurs at small and medium-size companies apparently feel the same way: Since Congress passed the Sarbanes-Oxley corporate reform act last summer in the wake of ruinous financial scandals at Enron Corp., WorldCom Inc. and other firms, 63 going-private transactions have been announced in the U.S., a 34% jump from 47 in the comparable nine-month span a year earlier, according to data tracker FactSet Mergerstat.

Companies that have recently announced or completed deals to go private include 152-year-old Dole Food in Westlake Village; Sports Club Co., which runs the upscale Sports Club/LA chain of gyms in Southern California; and software maker Resonate Inc. in Silicon Valley

Many Fed Up With

Costs of Being Public

The trend is accelerating, entrepreneurs and investment bankers say, because many companies are fed up with the growing expense and regulatory burden of being public -- especially if their stock price has been crushed by the bear market.

"Some companies have gotten exasperated," said Ric Kayne, chief executive of L.A.-based Kayne Anderson Capital Advisors, which, along with Sports Club's founders and another equity firm, has offered to buy out the other shareholders and take it private for $3 a share, or about $55 million.

"The costs of being public are going up," Kayne said, "and the benefits are going down."

As Jon Goodman, a private investor in Los Angeles and author of an upcoming book about the effect of the Sarbanes-Oxley Act, put it: "They are asking themselves, 'Why go through the headache?' "

Many of the companies thinking about going private have been shunned by Wall Street brokerage analysts and large investors leery of their thinly traded shares, and are unable to tap the capital markets with new debt or stock offerings.

"The bear market has created a significant number of orphaned public companies," said Johnny Lopez, head of mergers and acquisitions at Platinum Equity, referring to firms with no analyst coverage.

"Their valuations are depressed, and the capital markets are closed to them, " Lopez said.

Rex Licklider, co-chief executive of Sports Club, agrees.

His company had revenue of $122 million last year. "Any company doing less than $1 billion in revenue is off the Wall Street radar screen," he said. "And if you don't have analyst coverage and brokerage trading, it's difficult to extract the true value of your company."

The costs of being public are spiraling not only because of Sarbanes-Oxley reforms but also because of new listing requirements at U.S. stock exchanges.

Overall, according to an estimate by corporate law firm Foley & Lardner in Los Angeles, for the typical "middle market" company (with $1 billion or less in annual revenue), the cost of being public has risen to $2.5 million a year from $1.3 million before Sarbanes-Oxley.

"The cost falls disproportionately on the smaller companies," said Lance Jon Kimmel, an attorney at Foley & Lardner.

In today's heightened regulatory climate, public firms must spend more on everything from forensic accountants and additional legal staff to director salaries and segregated Web sites for potential whistle-blowers.

Meanwhile, directors and officers face escalating insurance premiums -- if they can get coverage at all -- amid higher scrutiny and liability fears.

Given the rising burdens involved in being public, investment banker Brooks Dexter of L.A.-based USBX Advisory Services said, he has discussed the going-private option with six corporate clients in the last three months, and he said each is seriously considering it.

One, which he declined to name, is a technology company that generates about $2 million in annual operating profit but figures it will spend $1 million a year staying public, Dexter said.

"They could increase their cash flow by 50% just by going private. That's one of the few synergies a buyer will pay for, since it's so clean."

Aside from cost savings, there may be strategic advantages to being private.

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