When Nicolet Bankshares “went dark” in March, the event was marked with little
fanfare. The Green Bay, Wis.-based community bank executed a reverse stock split
that left it with fewer than 300 shareholders, meaning that it no longer had to
file financial statements with the Securities and Exchange Commission or bear
the huge cost of complying with the Sarbanes-Oxley Act. The action marked the
end of a dream for cofounder Michael Daniels. “We wanted to be publicly owned.
If you are a community bank, it makes sense that you want your customers to be
investors as well,” he says. “So we asked all the members of our community to
buy into the institution.” And they did: Clients, relatives, friends and
neighbors lined up to buy stock in Nicolet at $10 a share in its $18 million
initial public offering in 2000, and at $12.50 in the $13 million follow-on
offering two years later.
 | | (Illustration by Ken Orvidas.) |
All too soon, however, Daniels and cofounder Robert Atwell found themselves
facing dilemmas common to entrepreneurs who have taken their small companies
public in the last few years. These businesses are often overlooked and ignored
by Wall Street in the wake of the research scandals that have depleted the
resources of investment research teams. Nicolet Bankshares stock was overlooked
by analysts and therefore traded only intermittently. Meanwhile, the costs of
being public were mounting, due to new governance rules passed by legislators,
regulators and the stock exchanges. Complying with the Sarbanes-Oxley Act alone,
the founders calculated, could have cost the firm $400,000 a year. “That just
didn’t make financial sense, however much we talked and talked about this in
board meetings,” Daniels says.The Private Life
The tough decisions that Daniels and Atwell confronted are ones that more and
more entrepreneurs who have taken their companies public, and the directors who
sit on their boards, will have to grapple with as the crushing financial burden
of complying with Sarbanes-Oxley bites into their profits. They must determine
if their companies derive enough benefit from being public—in access to the
capital markets, in credibility with customers or suppliers, in marketing
clout—to offset those costs. Increasingly, the answer appears to be no. TOP VIEW
The difficulties and costs of maintaining a public listing—in particular, the burdens of complying with the notorious Sarbanes-Oxley Act—have prompted a
growing number of small companies to turn their backs on the public markets by
going “dark.” While the allure of being a privately held corporation may seem
attractive to harried corporate executives and board members, the process itself
is fraught with difficulty and legal peril for those undertaking it. |
Every year since the technology stock bubble burst, a growing number of
companies have applied with the SEC to delist their stock, according to a study
by the Olin School of Business at Washington University in St. Louis, the
University of Amsterdam and the Ross School of Business at the University of
Michigan. Data compiled by FactSet Mergerstat shows that by midsummer of this
year, some 55 companies filed with the SEC their intent to go private through
some form of buyout of their publicly traded stock. Both the number of
transactions and their value are climbing: In 2004, only 64 companies went
private, and while 110 companies took that route in 2003, the value of those
deals was a mere $7.9 billion, compared to $45.8 billion in the first half of
2005. Those figures do not include a larger and more-rapidly growing group of
companies like Nicolet that do not use a buyout to go private. These other types
of going-dark transactions may have resulted in as many as 190 additional
companies going private, based on their SEC filings. However, the process of making the decision to go private and then implementing
it is a difficult, costly, time-consuming and potentially hazardous one for the
senior managers and directors. “If I had known in advance what the hurdles would
be,” says a director of a small Midwestern industrial company that discussed the
possibility of going private, “I wouldn’t even have had the subject raised in
the boardroom. It’s expensive—and shareholders foot those legal bills—and it
could have led to all kinds of undesirable outcomes for us in the long run if we
had gone ahead.” In stark contrast to the process of going public, going private again is more
likely to be met with litigation than celebration. “I warn any client that is
going private that they will be sued; it’s automatic,” says Thomas Magill, a
partner at Gibson, Dunn & Crutcher who has provided legal advice to dozens
of companies that have gone private. “The plaintiffs will claim that the special
committee formed to consider the transaction has breached its fiduciary duties
before that committee has met or made any decisions.” Magill’s clients have been
approached by shareholders’ lawyers seeking higher valuations almost as soon as
they announce a deal. To improve chances of winning such a suit, management
should get a valuation or multiple valuations from truly independent firms. The
company should offer the high end of the range, or even above it.
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