In recent years, private equity firms have purchased increasing numbers of publicly traded companies.
Since the early 2000s, billions of dollars have flowed into funds controlled by private equity groups. Those groups need to invest those dollars to make money and are increasingly competing with each other to buy companies.
Companies with less than $1 billion in revenues have been attractive to private equity buyers. Many of those companies have good growth prospects, but are being held back by the Sarbanes-Oxley Act of 2002 (SOX), high management costs, the inability to recruit board directors and a lack of analyst coverage of small public companies.
SOX compliance is one of the biggest drawbacks for small public companies, said Steven Bernard, director of merger and acquisition market analysis at Robert W. Baird & Co. Inc. in Milwaukee.
“Every dollar you spend on Sarbanes-Oxley compliance is a dollar away from anything else,” Bernard said. “It’s going into a black hole of non-productivity.”
Because small public companies haven’t been able to attract analyst coverage, attracting new investors has become difficult.
“The bottom line is that with the institutional money that’s out there, the analyst compensation doesn’t make it worthwhile for some smaller companies to be public, because there’s so little interest (in the markets),” Bernard said “There are tons of quality companies that are out there. They are public, but a lot of times don’t feel that the value of the company is reflected in the stock price.”
In 2006, 129 U.S. public companies were taken private, with about $328 billion in total deal transaction fees, according to the most recent Baird research, Bernard said. In 2005, there were 68 such purchases, with a market value of about $70 billion.
Baird’s definition of a take-private acquisition requires the purchased company to be a publicly traded firm bought by private equity, management or a founding family that will run the company in a similar way, Bernard said.
“There is still a tremendous number of these type of companies out there, and there’s so much private equity money, we will see more of these types of transactions,” Bernard said.
Some of the multi-billion dollar companies that have been taken private by private equity groups will need to be put back out on the public markets in the future. However, smaller companies will probably be sold to other private equity firms or strategic buyers, instead of going back to the public market, Bernard said.
“Quite frankly, I don’t see a lot of value for being public,” he said. “If the companies have good value, they’re not needing to tap public markets to raise capital.”
