Will “Going Private” Become Predominant Over M&A?

With all the M&A chatter, I felt someone should address an area not being cheered on by our favorite television news personalities.  The occurrence of publicly-traded companies going private as a result of the economic turn-down.  But why aren’t they cheering?  Is it really no big deal?

Gander MountainIt began early Monday with CNBC reports the market would open higher on M&A activity and then a blip across the news wire caught my eye.   Gander Mountain [GMTN] announced a 1-for-30,000 reverse stock split.  1-for-30,000?  That was a staggering amount and I became intrigued.  Further reading revealed this action will lower the total number of beneficial shareholders to less than 300 allowing Gander to deregister its stock  from the SEC and take the company private.  So why go private?  Clearly acquiring compeditors would be out of question for them with a declining share price near $5.00/share.   Were they in fear of being delisted from Nasdaq in the near future?  Are they experiencing financial difficulties as a result of the economy? There’s been much speculation over the last two years of Goldman Sachs going private and heavens knows they have no financial problems at this point.  Still curious I did a little more digging.

GMTN 9.29.09

GMTN went public in April 2004 and while they attempted to gain market share by purchasing competitor Overtons and its subsidiary Consumers Marine in 2007, expanding their number of store locations nationwide and launching an internet catalog operation in 2008, the stock price itself has underperformed. 

To explain somewhat, there are numerous reasons a privately held company would opt to go public, some of which include but are but not limited to:

  • Increase capital-raising capabilities in order to reduce debt, expand marketing or future research & development.
  • The increased ability to expand and gain market share through M&A as the stocks value acts as a currency.
  • Increased visibility worldwide as its ticker symbol is linked invariably with its partners, customers and publicly-traded competitors in print media and via the internet.
  • Publicly traded companies have a higher overall valuation which becomes especially valuable in the event of a tender offer or hostile takeover attempt.
  • The ability to recruit top talent to the firm by offering the benefit of stock options to potential employees. 

Going public, however, also has its drawbacks:

  • Less control over Corporate direction with approvals being required by a Board of Directors and shareholders.
  • Increased government regulatory controls and oversights.  Just imagine SEC paperwork alone.
  • Higher expenses not only to be listed on an exchange such as Nasdaq but also from the requirement to issue quarterly statements to the SEC and its shareholders.
  • Greater public and shareholder scrutiny where actions can sometimes be forced more for the short term rather than the long term benefit of the company.  Unhappy shareholders have the ability to doom a company; devalue its stock price, reject reverse splits needed in order to avoid being delisted and doomed to the Pink Sheet Graveyard from which a great majority of thinly traded issues never recover.
  • Once publicly traded, a company may have difficulty obtaining outside financing to go private again and may then become trapped, delisted, price continues to fall and eventually ends in a failure of the business.

One could argue GMTN made a poor decision going public in ’04 but it could have merely been bad luck. Clearly with its heavy debt load  and expected slow, prolonged economic recovery ahead, they are fortunate to have found the financing to return to the private sector. 

The question in my mind now is how many other small companies will be this fortunate to survive the extended recovery and remain pulicly traded?  One must consider that GMTN is a well known, nationwide corporation with 118 locations in 23 states.  What of the thousands of other small and mid caps out there? 

I think back to the Dot.com bubble and the large number of companies which were absorbed via M&A or died their slow death in OTC land.  The economy in 2000-01 was much, much healthier and banks were lending contrary to today.  It would seem entirely logical that without a marked increase in bank lending, M&A will pale in comparison going forward versus Corporate failures and a return the private sector.  Is the GMTN announcement the tip of a larger, more perilous iceberg ahead, the underlying enormity of which would damage exchanges worldwide?  It would seem CNBC and their counterparts would rather stay out of the water at this point.

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