Going Private In Vogue

April 11, 2005
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GRAND RAPIDS — As the heightened regulatory environment of the Sarbanes-Oxley era has proven prohibitive to new public offerings and costly to those currently traded, many cash-strapped companies have been seeking a way out.

A handful of West Michigan companies have recently undergone a class of corporate restructuring collectively known as going-private transactions, the voluntary delisting and deregistering of common stock.

"There is a combination of things causing public companies to go private," said Steven Waterbury, a partner at Warner, Norcross & Judd LLP who has guided a pair of local companies through the process. "Part of it is cost driven. SOX — while an understandable reaction to corporate scandals — has increased the cost of being a public company significantly."

Waterburysaid that even for the smallest issuer, costs have risen by over $100,000 a year.

According to The Journal of Business Law, going-private transactions have increased 30 percent over the past year. Dow Jones reported that nearly 200 firms delisted in 2003, with estimates that as many as 250 did so last year.

Waterbury said that candidates are usually "market orphans," having a low market value, no analyst coverage and little liquidity.

"If you try to sell stock, the price immediately goes down," Waterbury said. "These market orphans don't get all the benefits associated with going public. They have no enhanced liquidity or an ability to raise capital, yet they are still subject to all the expenses of being a public company."

Hastings Manufacturing Co. fit that description. For the supplier of internal engine components, going private became a cost savings measure in its darkest day.

In the second quarter of fiscal 2003, bearing and piston ring sales fell by more than 19 percent, the North American replacement parts market softened considerably and automotive OEMs cut production volumes.

Traded on the American Stock Exchange, Hastings had dropped from a 1999 high of $20 per share to $4.30. With the ill-timed acquisition of Ertel Manufacturing Corp. and Syzegy Auto Distribution, Hastings' short-term debt load had skyrocketed from $5 million to $17.6 million.

It reported a negative net worth of $5.1 million as its market capitalization bottomed out at $3.3 million. Hastings laid off 20 percent of its work force that April.

A month later, Chairman and CEO Mark Johnson announced a bold strategy.

"After careful consideration, the board of directors has determined that moving to voluntarily delist and deregister our common stock is a prudent course of action for Hastings Manufacturing and all of its constituent employees, customers, suppliers and shareholders."

Johnson cited the rapidly rising costs associated with SEC reporting and compliance as the primary reason for the move.

For similar reasons, Kalamazoo-based conveyer and industrial equipment maker Prab Inc. went private through a merger with Kalamazoo Acquisition Corp., an entity created by its management and board of directors strictly for that purpose. Outstanding shares of Prab common stock not owned by KAC were bought out for $2.40 in cash.

While both Hastings and Prab are no longer registered with the SEC and subject to SOX compliance, there are key differences between the two outcomes.

Prab has returned to the private ownership it experienced earlier in its lifecycle, defined by the SEC as having fewer than 300 shareholders.

Hastings is still a publicly held company, and is now traded on the Pink Sheets, an over-the-counter service that does not carry SEC filing requirements.

In this market, the bid/ask spreads are wider, commissions are higher, smaller quantities change hands, analyst and media coverage is nonexistent and liquidity is much lower.

Clarion Technologies dropped off the Nasdaq into the Pink Sheets recently, as well.

"Going pink," also known as "going dark," is often the best option for companies without available capital for a complete buyout of common stock.

But with a growing venture capital and private equity market, the buyout is becoming more common.

"In the past, there wasn't an active private equity or venture capital network like there is today," said Jeff Lambert of Lambert Edwards & Associates. "If you wanted liquidity, that was the way to do it."

This was seen in last month's buyout of SunGuard Data Systems for $11.3 billion by a group of the world's largest private equity funds.

Locally, Autocam Corp. was brought private by Aurora Capital Group in 2000.    

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