Smaller Public Companies Looking to be Cost Efficient are Going Private

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April 6, 2010

In the midst of a struggling economy and with concerns surrounding the excessive costs associated with being a small or mid-cap public company, it is becoming more and more common for companies to seek relief by opting to be delisted, cease their status as a public company, and "go private". There are numerous companies that have adopted this business strategy in the recent years.

In an era of recent public company accounting scandals, Sarbanes-Oxley ("SOX") implementation and compliance, various comprehensive disclosure requirements and corporate governance rules and regulations surrounding public companies, going private is becoming a popular solution for many smaller public companies. Companies are willing to leave behind the public company persona and choose the cost-saving route.

Benefits of Going Private

Companies may wish to consider the possibilities and benefits for going private and alleviate themselves of the public status. Some of the advantages are as follows:

• There is an opportunity to lower external costs including:
  • Legal
  • Accounting
  • Insurance
• There is an opportunity to lower internal costs:
  • Board and audit committee members compensation
  • SOX related costs
• Companies can be more flexible and focus on research and development.
• Long-term business strategies can be pursued.
• Financial and executive pay confidentiality is maintained.
• Management can run the company with more flexibility and less time spent in meetings and related communications.
• Exposure to securities-related litigation is greatly reduced.
• There is greater flexibility in estate planning for closely held entities.
• There are potential tax savings opportunities to change the company corporate structure to an "S Corporation" status which eliminates double taxation.

Disadvantages in Going Private

Although there are many attractive benefits to going private, there are several notable risks associated with going private that companies should take into consideration. A few potential risks include:

• Initial costs to go private are usually considerable.
• Access to funds through capital markets may decline.
• Less brand recognition due to less market exposure.
• Potential for shareholder litigation may greatly increase as a result of going private due to conflicting interests with management.
• Companies often face employee disappointment and lack of motivation.
• An increase in the cost of debt due to increased interest rates.
• Going private can cause a lack of corporate visibility.
• A more concentrated ownership of the company's shares of stock can result in a greater threat of a hostile takeover.

Rowbotham & Company LLP can help assist companies further understand the process of going private and also help determine whether it's the correct route for them to take. Please contact Mark Kelly or Eric Symkowick at Rowbotham & Company LLP for further questions.

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