Public companies lean toward privatization

Springfield stainless steel machinery manufacturer Paul Mueller Co. announced Jan. 3 that it would no longer trade its stock publicly on the Nasdaq. The company, citing increased costs and lack of interest from traders, said it will deregister its 1.19 million shares of common stock by April, essentially making the company private.

Mueller officials declined to comment for this story, but Mueller President Daniel C. Manna, in a news release, said, “Our board of directors … has concluded that the disadvantages of continuing as a public company far outweigh the benefits to the company and its shareholders.”

The release cited several factors for the decision, including the costs of compliance with the Sarbanes-Oxley Act and the Securities and Exchange Commission.

John Q. Hammons Hotels Inc. also is chasing a return to the private sector. The company is in exclusive negotiations with Barceló Crestline Corp. to sell all of its Class-A stock, essentially making Hammons Hotels a subsidiary of the private Virginia-based Barceló. (See related story below.)

A national trend

The two companies are examples of a growing trend in corporate America. More companies are seeing the benefits of private over public ownership.

Hammons Hotels Vice President Scott Tarwater said the problem is uncertainty about the new laws and how they affect small public companies.

“The compliant cost of Sarbanes-Oxley is a moving target,” he said. “One of the disadvantages for a small public company like ours is we never know what the cost is going to be, and we have to explain that to the stockholders. We like to deal in finite facts, and when you’ve got a governmental agency and a moving target, that’s a recipe for increased costs.”

According to a PricewaterhouseCoopers study, 58 percent of companies with total revenues under $1 billion said the new regulations were somewhat costly. Among the reasons cited for the increase costs: documentation, legal requirements and self-assessment.

“The big driver with a lot of smaller firms going private now is with the environment – the legislation of Sarbanes-Oxley and the regulation coming out of the SEC. The cost of being a public company has increased dramatically,” said Andy Lear, a partner with BKD LLP. “The advantage to being a public company is access to capital – the ability to trade stock and raise capital – but if you’re a smaller concern, and your stock is thinly traded anyway, then the cost of access to that capital market is just too excessive.”

David O’Reilly, CEO of O’Reilly Auto Parts, said his company has felt the hit from increased compliance cost.

“We don’t have an exact number, but the Sarbanes-Oxley rules have increased our costs significantly,” he said. “It is definitely in the six-figure range and up.”

O’Reilly Auto Parts is not considering privatization because there are still a lot of advantages to being publicly traded.

“(Public trading) provides a source of capital for us,” O’Reilly said. “It also provides a vehicle for all of our team members to be owners in the company through various stock option and purchase programs.”

Jack Stack, CEO of Springfield Remanufacturing Corp., said there is another key advantage to public trading. Although SRC is not publicly traded, Stack works with public companies like Springfield-based Decorize Inc. through venture capital firm Quest Capital Alliance.

“The real advantage of being a publicly owned company is that it provides liquidity for shareholders,” Stack said. “It allows shareholders to sell and exchange their stock, whereas in a privately held company it’s really very hard to do that.”

Lear said, despite the advantages, the trend of public companies leaving the markets is going to continue.

“Sarbanes-Oxley had some delayed effective dates for smaller companies,” Lear said. “Those companies with a market capitalization of $75 million or more have to comply right now, whereas smaller companies are beginning to have to comply over the next year. So, I think what you’re going to find is a lot of these smaller (public companies) attempting to go private just trying to avoid that cost, and then try to raise capital through private placements. I think you’ll see more of that over the next 12 months.”

In reaction to the trend, SEC officials announced Dec. 16 that they are creating a panel to determine whether small public companies are being forced to pay exorbitant costs to comply with the 2002 reforms.

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