When Might a Public Company Want to Revert Back to a Private Company?
January 16, 2014
By Marc Fogarty, CPA, CFE
When the Sarbanes-Oxley Act was first announced in 2002, there were a lot of public companies that considered going back to private company status because the increased complexity of audits was costing a lot more in cash and manpower hours. Companies were concerned about not having the resources to meet the new requirements, and were seeking to relieve the strict audit governance and regain more control of their day-to-day management decisions. Today, driven by these and other motivating factors, several well-known brands, including Dell Inc. and Crocs Inc., have either become private companies again or are in the process of making that decision.
The most popular reasons why a public company might want to reverse their public status and become a private company are that their business model has changed, the brand is strong enough to survive on its own merits, and it’s less expensive on an ongoing basis. If you could save $6 million a year (depending on relative size of the company) by not being a public company and you could still do the same amount of business, it might make sense to remove the time and effort spent dealing with regulations and compliance while saving money on an ongoing basis.
Dell Inc. regained private company status this past October, 2013. Founded in 1984, Dell's business flourished in the mid to late 1990s as one of the premier online resources for customized PC computers. As a globally recognized brand name, their reputation lies in the quality of their product, not in their perceived status of whether they are a publicly traded company. Would the public abandon the brand because they aren’t a publicly traded company? Probably not. If Dell's sales profits are generating enough equity to sustain or grow the business, then it may make sense to change back to a private company and reduce operating expenses while still maintaining the same level of profit. Not only do they save in fees going to third parties but they may not need as many in-house people whose resources were dedicated to supporting the requirements of being a public company.
It sounds attractive for a company to go public to raise funds and gain brand recognition, and then many years down the road return to private company status. But, reversing a company back to private status is expensive and should not be taken lightly. Footwear manufacturer Crocs enjoyed a robust public offering and subsequent stock price climb after their public debut in 2006. As time passed and the market trends shifted they experienced a steady drop in sales and profits, consequently diminishing consumer confidence and, as a result, plunging their stock price. Their newly lowered stock price presented an opportunity for the company, backed by a small group of venture capital firms, to buy out the public shares of the company, returning ownership to private status. (As of this writing no official deal has been made.) While this proposed move from public to private may relieve the company's equity volatility and reduce the effort of their reporting compliance, it should be noted that financial reporting responsibilities and management supervision ARE NOT a thing of the past -- they still need to answer to the requirements of the investors/private equity companies that assisted with the buyout.
While returning a public company to being privately held does have many perks worth considering, the move does not come without significant obligations beyond the initial administrative costs.
We hope you’ve gained something from this series of blog posts. Next week, we’ll wrap things up and give you some ‘food for thought’ as you consider your next move.