Why do companies go private?
We learned last week that the founding family of the department store chain Nordstrom is looking to take the company private, according to an exclusive report from Reuters. This comes about six years after Nordstrom previously tried and failed to go private.
The news raises some questions about why a company would decide to make this move in the first place, and how the process works. William R. Snow is managing director at Focus Investment Banking and an expert on mergers and acquisitions. He spoke with “Marketplace Morning Report” host Sabri Ben-Achour for more on this, and the following is an edited transcript of their conversation.
Sabri Ben-Achour: So, look: Companies go to all this trouble, all this hoopla, to go public. It is literally the dream of so many startups to go public. Why do companies sometimes try to reverse all of that and go private again?
William R. Snow: Because being a public company is a pain in the keister for a lot of companies. You go public to create liquidity, quite often, for the startups. They have investors, investors want to get out, get their return, and that’s reasonable, of course. But when you are public, you are under all kinds of added scrutiny, you have a lot of filings that the SEC requires when you’re listed here in the States. You’ve got to hit your quarterly numbers when you’re public — Wall Street will beat you up. So there’s a lot of good things about being a listed company, but there’s a lot of negative as well.
Ben-Achour: Does that mean they’re going through something? They need to make some decisions that are going to be hard to get through shareholders, or having some kind of challenge they need to do in private?
Snow: Absolutely. Quite often, it’s going to be a company that is having some sort of challenge or problem. Either that’s due to failure at the company, or maybe some sort of change in the general environment.
Ben-Achour: And how does it work? Do you have like an inside investor who just wants to grab up the whole company? Or do you have outside people that want to come in and take it? How does it work exactly?
Snow: Generally speaking, you’re going to want to have investors, probably an investor group. And most listed companies, you’re talking about hundreds of millions, billions of dollars, in terms of market cap. So, all these shareholders own the company, and they have a certain amount of value tied up in their shares. And so if you want to buy those shares, you’re going to have to come up with money — probably exceed whatever the company is trading at, to give those shareholders the incentive to say, “Yeah, we’ll tender our shares, we’ll sell our shares to this new investor group, because we see that as the best way to create value for ourselves.” Quite often, private equity firms will get into this and do what they need to do — sell off pieces or make acquisitions. Fix what they can fix, and then maybe look at selling it and maybe relisting those shares or listing those shares again at some point in the future.
Ben-Achour: Sometimes the effort to go private fails. What are some reasons why that might happen?
Snow: The group that is trying to take the company public maybe can’t come up with the money. How are they going to finance that? Well, maybe they have a private equity firm, they’re probably going to borrow some money as well. Does the bank start to get nervous? “Well, do we really want to extend this credit to the situation?”
If the shareholders reject the offer, then they can’t go forward with it. So it can be numerous reasons, such as those.
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