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Going private in a troubled market

With investors treating many tech stocks like financial lepers, who would blame a CEO for wanting to hide out by taking a company private?

With investors treating many tech stocks like financial lepers, who would blame a CEO for wanting to hide out by taking a company private?

The idea may not be as farfetched as it seems. Analysts say many tech companies should consider the prospect of going private to rebuild their businesses, getting out of the harsh glare of Wall Street, where a minor misstep can send shares--as well as employee and customer confidence--tumbling.

"Going private buys you time," said Richard Kish, a professor at Lehigh University in Pennsylvania. "You avoid a public display of collapse and you're still running the company, but in a quiet setting."

Going private would mark a reversal from the frothy days of 1999 and 2000, when infant companies could go public and raise hundreds of millions of dollars in initial public offerings--a state of business Federal Reserve Chairman Alan Greenspan famously described as irrational exuberance.

Fast-forward a couple years, and dozens of those IPO stars have filed for bankruptcy, closed up shop or been sold for chump change. Many of the survivors are trading for $1 a share, while a number of large tech companies have fallen below the important $5 share level--despite having cash reserves that make an imminent shuttering unlikely.

"The last couple years, too many companies have gone public too early in their life cycle," said David McGovern, head of mergers and acquisitions at Gores Technology, which owns Micron PC, Verifone and other tech companies. "Now the market has abandoned them."

So why not abandon the market during a period of what some might consider irrational pessimism?

Going private requires enough money to buy out current stockholders, an expensive proposition even in a depressed market. The benefits include getting off the quarter-to-quarter treadmill, restructuring in relative anonymity and saving substantial market-listing costs.

The downside is an inability to tap public markets for funds--an increasingly remote possibility, anyway.

One tech company that could be considered a trailblazer is hard-drive maker Seagate Technology, which went private in June 2000. Since then, Seagate has launched a slew of products and improved its profit margins.

"A lot of executive time was spent dealing with stock issues...Now we get to focus on nothing but the client."
--Chan Suh, CEO, Agency.com

Following Seagate's lead, Agency.com, Buy.com, Micron Technology and Enterasys Networks' Aprisma unit also have moved off Wall Street. That short list could hardly be considered a harbinger of things to come, but some analysts say more names may soon be added.

Charter Communications, for example, recently said in a regulatory filing that Microsoft co-founder Paul Allen, the company's primary shareholder, may "propose a going private transaction in the future that would result in Mr. Allen acquiring beneficial ownership of all or substantially all of the common stock."

Analysts said the typical profile of a company going private is one that has the potential to make a profit but has to restructure to get there. Typically, there's enough cash to finance operations in the meantime. Companies that have left Wall Street note they can better focus on their businesses because they don't have to fret about hitting estimates or wild stock-price swings.

"We run our company with a long-term focus and many of the programs and initiatives that have brought us success today were underway at the time of the privatization," Seagate said in a statement. "However, operating as a private company has given us increased flexibility to accelerate many of those programs and initiatives."

Cash rich, stock poor
The following companies trade near or below their cash and marketable securities minus total liabilities.

Company (ticker) Market cap
(in millions)
Cash*
(in millions)
  AvantGo (AVGO)

    20     25  
  Avici Systems (AVCI)

    43     69  
  Backweb Technologies (BWEB)

    11.5     26.7  
  Blue Martini Software (BLUE)

    61     58.9  
  Crossroads Systems (CRDS)

    18     33.6  
  Infospace (INSP)

    173     170  
  Vicinity (VCNT)

    59.5     75  
*cash and marketable securities minus total liabilities
Source: Scott Larson, assistant professor, National-Louis University and SEC filings. Market cap through Aug. 28.

For the scores of tech companies that trade close to their cash value, going private may not be such a bad idea.

In a recent study, Scott Larson, an assistant professor at National-Louis University, found that more than 200 companies with stock prices near or below their cash and marketable securities, after subtracting total liabilities. Many of those companies are former tech highfliers.

For these companies, "a move to go private would make a lot of sense--especially given the costs of keeping a public listing," said Larson.

On the Nasdaq stock exchange, the price tag runs nearly $700,000 per year--not including additional overhead, management and time demands. Expenses for insurance to defend against class-action lawsuits and compliance with new Securities and Exchange Commission requirements continue to rise, he added.

Behind closed doors
Going private means companies can become more focused because they have one less thing to worry about--managing Wall Street.

"You don't have to answer to anyone but the owners," said Louis Stanasolovich, CEO of Legend Financial Advisors, based in Pittsburgh.

Companies such as Seagate can stay devoted to research and development, as well as chancing new markets, without being overly concerned with reducing the current quarter's profit margins. And struggling companies that need to restructure can do so without attracting headlines, which can spark concern among customers, employees and shareholders.

"Sometimes companies need painful restructuring and it's best to do that out of the public eye," said McGovern.

For instance, Agency.com, which completed an IPO in December 1999 and went private last October, has cut the number of employees from a peak of 1,500 to 450 today.

"Most go private because they are struggling, and when they go private they usually run up a huge amount of debt."
--Chan Richard Kish, professor, Lehigh University

Like many dot-coms, the Internet services company was burning through cash and needed more funding, but its options were limited. "We could either soldier on and try to sneak by or become a private company," said Agency.com CEO Chan Suh.

Agency.com went the private route by selling out to Seneca Investments, which invests in services companies. The deal, which valued Agency.com shares at $3.35 each, threw the company a lifeline. Although shareholders received cash, there were some glitches and Agency.com had to settle a class-action lawsuit.

The move was well worth it, said Suh, who estimates the company was spending $3 million to $4 million a year to meet the requirements of being a public company. For larger companies that may be inconsequential, but for Agency.com it was "a big difference," he said.

Meanwhile, Suh said the company can focus more intently on its business. "A lot of executive time was spent dealing with stock issues," he said. "We weren't a large company and it just wasn't worth it to us. Now we get to focus on nothing but the client."

Suh wouldn't reveal Agency.com's financial figures, but said the company is in the black. "We're in a good setting with operations," he said.

Seagate's financials also improved. The company reported net income of $153 million on revenue of $6.08 billion for the fiscal year ending June 28--an improvement over 2001 but below the company's 2000 performance, its last before going private. For fiscal 2000, Seagate reported net income of $310 million on revenue of $6.45 billion. However, Seagate's 2002 gross profit margin of 26.2 percent is better than the 16.9 percent and 19.4 percent it posted in 2001 and 2000, respectively.

No cure-all
Going private, however, isn't a universal fix.

Lehigh's Kish notes that private companies can quickly be run down by debt. First, a company has to buy out existing shareholders, often with debt. Any future financing is also typically debt.

"Generally, there are two problems," said Kish. "Most go private because they are struggling, and when they go private they usually run up a huge amount of debt."

"If the market has already abandoned a company it makes sense to go private, get all dressed up and come out again."
--David McGovern, head of mergers and acquisitions, Gores Technology

But McGovern said the debt worries are overblown. Many companies going private couldn't count on Wall Street to raise money anyway because their share prices have been hammered.

"If the market has already abandoned a company it makes sense to go private, get all dressed up and come out again," McGovern said.

Companies with a stable revenue stream, brand recognition and a realistic plan to turn profitable and downtrodden stock prices should consider going private, he said. Companies with cash and no viable business plan need not apply.

"We have to know that the patient isn't going to die on the operating table," he said.

Gores considers privatizing companies that may wind up as a "tuck-in," or a business that functions better as a unit of a larger company. If a company turns itself around, Gores will look for a buyer to take it to "the next level." Last week, Gores sold consumer software vendor Broderbund to Riverdeep in a deal valued at $57.2 million.

Private trickle
Although going private is at least worth considering, analysts note there isn't a groundswell yet.

"I don't understand why more companies aren't going private," Stanasolovich said.

Among the possible candidates: Larson's cash-rich-stock-poor study turned up names such as AvantGo, Backweb Technologies, Blue Martini Software, Cacheflow, Infospace and Vocaltec.

Some companies are still hopeful that investors will return and boost their stock prices.

"Companies are trying to grow their way out of it instead of resetting the business," said McGovern. "But going private is often the best thing for employees and public shareholders. Sometimes if a company doesn't go private it'll never be fixed."