Privatizing Public Companies

An estimated 5,000 public companies have a market capitalization less than $250 million. For many of these companies, the operating model is not working because of a lack of capital. They need more money to grow but are too small or in an "unattractive" industry to access the public market for this money.

There are few options available to the shareholders of these companies to recoup their investment and little chance to realize a capital gain. The best alternatives are a private placement of equity capital, merge with another company, or to go private. All of the options are analyzed in order to maximize shareholder value.

This section will focus on privatizing. For a detailed description of private placements of equity capital and merging, see the sections entitled "Recapitalizations" and "Mergers", respectively.

Several factors can be used to quickly evaluate whether a public company is a likely candidate for a privatization. Amvest will perform a comprehensive analysis taking into account all pertinent factors.

1. Stockholders' Investment - the initial investment is "under water," e.g., the IPO price is higher than the current price per share or owners of large blocks of stock have unrealized losses.

2. Financial Under-performance - earnings are either erratic or show little or no growth for the past three to five years.

3. Investor Fatigue - small and large investors have held the stock for a long time without significant price improvement.

4. Analyst Disinterest - only a few analysts or none at all cover the company.

5. Stock Ownership Concentration - there are one or two major shareholders or ten or fewer shareholders control a majority.

6. Business Complexities - a serious lawsuit, environmental issue, bankruptcy or other extraordinary event exists.

Amvest works with the major shareholders or management to determine the best available alternative to maximize shareholder value. Amvest analyzes the advantages and disadvantages of each alternative and makes a recommendation based upon numerous factors.

Amvest searches and screens private equity groups and leveraged buy-out firms that match the needs and desires of the shareholders or management. These needs are not limited to funds or ownership percentages, but include industry experience, managerial, operational or financial expertise, sales and marketing strategies, turnaround experience, and the ability to introduce services and products from other portfolio companies.

Amvest coordinates certain privatization activities on behalf of management so impartiality and conflicts of interest issues can be avoided.

There are several benefits to going private by a public company to be considered by a major shareholder or management:

1. Access to Capital - a well-funded private equity group typically provides growth capital and acquisition capital at time of closing.

2. Long-Term Focus - management can make decisions based upon long-term profitability versus short-term stock price swings.

3. Cost Reduction - the elimination of costly SEC and regulatory filings can save an estimated $500,000 or more per year.

4. Management Incentive - in many cases, management owns very little of a public company despite having the responsibility for performance. A privatization allows management to have incentives tied directly with performance and share simultaneously with the large shareholders.

5. Board of Directors - private equity groups fill the Board with individuals knowledgeable of the company's industry and who can add immediate value to management and the company through networks.

6. Sarbanes-Oxley Act of 2002 – has complicated the lives of corporate executives and laced an increased burden on public corporations.

The focus on Wall Street has shifted from high-flying dotcom’s toward value investing. Basic manufacturing companies with the ability to produce solid returns are gaining favor with private equity funds. This presents an undercapitalized and undervalued small-cap company the ability to raise equity capital that has not been available for several years.

Those management teams with little stock ownership are presented with a tremendous opportunity to control their destiny through a privatization. Any CEO or President in this position should seriously consider this option when considering strategic alternatives.