When A Company Goes Private

What happens when a public company decides to go private?

It’s been a tough year for Nordstrom.

First off, the company inadvertently became caught up in a political maelstrom thanks to the fact that it featured a fashion line from Ivanka Trump. Then, after removing Ms. Trump’s line from its stores citing ‘poor sales’, the company came under fire from the other side of the political divide.

There’s just no winning sometimes.

More worryingly for Nordstrom, however, is the battering its share price took on the market. Despite posting relatively decent results for a retailer in its first-quarter just over a month ago, the company has seen its share price fall almost 19% for the year.

That is, of course, until Nordstrom’s board said that it was considering going private.

When Companies Go Private

The Nordstrom family, who are the descendants of founder John W. Nordstrom, form the largest shareholder bloc in the company. About two weeks ago, they announced that they were considering taking the company private, causing the share price to jump as much as 15%.

Obviously, the poor performance of the company’s stock is one of the major reasons why a board of directors would consider taking a business off the public market. The fact that it’s a family-owned company also means that there are legacy and reputational considerations too.

But what are the underlying reasons behind companies choosing to go private? And is going private enough to save an ailing public business?

1. Acquired by a Private Company

Image Credit – Hans-Peter Gauster

One of the most common reasons why a public company will go private is that it has been acquired by a company that is already private.

We’ve talked before about the process of one company being acquired by another, and we’ve actually seen it happen recently with JAB Holdings—a privately held European business group—acquiring Panera Bread.

Though Panera Bread will continue to operate in pretty much the same way as it always has on a consumer level, it will no longer function as a public company once the deal goes through. This essentially means that you won’t be able to buy and sell shares of Panera on a public exchange. It also means that we won’t hear as much about how the company is doing in terms of quarterly reports (more about that in a minute).

Acquisitions are kind of a passive way of going private. All of the company’s outstanding shares will be bought by the acquirer (usually at a nice premium for the shareholder) and the company will simply become part of a private entity.

2. Avoiding the Spotlight

Image Credit – James Pond

Beyond acquisition, the other main reason why a company will choose to go private is to get out of the spotlight.

Public companies, by their very nature, are constantly under the investor microscope. This is best represented by the reports they are required to publish after every quarter and fiscal year, and well as the shareholder conferences and meetings they regularly hold.

This level of scrutiny is good for the general investing public, who have every right to be made aware of the performance of a company they have invested in. However, some companies believe that this reporting can also work to their own detriment in many ways.

For example, Wall Street analysts typically publish ‘expectations’ for companies before they report their quarterly figures. These are benchmarks that they expect the company to hit based on forecasts in terms of revenue, earnings, same-store sales, etc. If a company matches or beats these expectations, it will typically see its share price rise. However, a miss on these targets can cause the share price to plummet.

Some companies see these expectations as an unnecessary distraction from the long-term goals of the business. Indeed, if a company becomes too concerned with producing a good report every three months, the long-term objectives of the company could become neglected—which is far more damaging.

3. Less Regulation

Image Credit – Fabien Barral

Thanks to misdeeds of the past (Enron, we’re looking at you), public companies are subject to a lot more regulations than private companies. And much like the expectations we’ve just talked about, these regulations can sometimes distract a company from the more important business of long-term growth.

In the U.S, the Sarbanes-Oxley Act (SOX) of 2002 regulates much of what public companies have to do. In fact, it’s thanks to the SOX Act that companies have to report quarterly earnings figures in a standardized manner.

Although this level of regulation is ultimately in place to protect shareholders, the amount of administration and internal controls these responsibilities require can severely distract a company.

Look at Hain Celestial, for example. The company was forced to delay its quarterly filings last August because it was reporting some of its revenue in a way that might not have been in keeping with SEC guidelines. Hain decided to complete a full independent audit of its internal accounting practices, a process which is still dragging on to this day. Hain Celestial’s share price has suffered, and it is now even being threatened with delisting from the NASDAQ due to the fact that it hasn’t reported in nearly a year.

4. Fixed Investment

Stock Image - Money
Image Credit – Vitaly

Finally, the type of investment private companies receive varies greatly from that which public companies receive.

Whereas public companies raise liquid assets from the buying and selling of shares on the stock market, private companies usually receive sizable investments from large firms or investment groups. These types of investment tend to be much more stable because they typically include a covenant or agreement as to how long the investment will last—usually for a number of years.

When a company knows that it has secured investment for a set period of time—and that there won’t be a sudden rush to sell-off shares as can happen in the public market—management can focus on the long-term strategy for the business.

The Downsides

This isn’t to say that going private is the best option for every company, however.

Remember, there are plenty of benefits to being a public company. If there wasn’t, some of the world’s biggest companies like Apple, Amazon, and Alphabet wouldn’t choose to be publicly traded.

Trading as a public company means that it is very easy to raise cash in order to increase liquidity. Being a public company also means that a business may not have to go into debt in order to expand. And if a public company does need to borrow from a lender in the future, it’ll tend to get better rates on the debt it incurs if it is publicly traded because its financial actions are safeguarded by scrutiny from the SEC.

Employees can receive public stock as bonuses. CEOs and other members of the board can buy-back stock as a sign of confidence in the company. Stock can be issued in lieu of cash as part of future merger and acquisition plans.

For companies like Nordstrom, the negatives of remaining a public company have seemingly started to outweigh the positives. Going private is certainly an option for the controlling shareholders, but a very expensive one. Remember, all other shareholders in the company will have to be bought out by the Nordstrom family (at a premium) if they want to go private.

Nordstrom has had a tough time of it as a public company as of late, and the prospect of stepping out of the limelight as a private company is surely appealing to them at this moment in time. It’s definitely not a ‘fix-all’ for the business though, and it is a decision that will carry significant weight for the company if they eventually decide to make it.

 

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Rubicoin operates a full disclosure policy. Rubicoin staff currently hold long positions in Amazon, Alphabet (Google), and Apple.

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