Going public! (companies)

I know very little about the stock market other than what I’ve seen in movies. But there’s always a big brouhaha about “going public”. Which I assume means regular Joes can buy shares in the company. Which in turn, I guess, brings in tons of investment capital, and that’s a Good Thing. But it also gives shareholders, especially those with a significant number of shares, some control over the company.

So do any companies buck the trend and stay private? I mean, I guess, some must, even if it’s just a matter of time. So, what’s the largest (in whatever sense is appropriate) company that has decided to stay private, and why? Was there some actual economic incentive, or was it merely a matter of retaining control?

I’m assuming the USA here. I have even less of a clue how things work outside of the US.

According to Wikipedia,


There are lots of reasons to go or stay private, but I believe that retaining control is the primary one.

Although shareholders can vote for the board of directors, they do not influence control in any direct way. The role of the board is even limited–they don’t run the company operations. Once a company goes public, there is a disproportionate focus on increasing the share price, which often results in decisions that are good in the short term but do not build long-term value. When a company remains private, the owners can steer things to build value in the way that they want, not worrying so much about price projections and making quarterly numbers.

Public companies can be taken private, too. Seagate went private in 2000, and became public again a short time later under a different symbol (STX). Petco went private in 2006 and stayed that way.

(a) don’t assume ordinary Joe can buy shares, at least during the IPO. The process (IANAA/B) is that a brokerage undertakes to sell the shares for a commission(!). They then sell subscriptions for the shares to valued customers and other quid pro quo arrangements (!) to all their friends.

(b) the theory is that the shares are priced at what the market can bear, but in fact these shares are often priced far below “fair market price” (or rather, “hype market price”) meaning the close personal friends of the broker get to pocket a substantial windfall by immediately flipping the shares for a signifcant profit. Basically, the underwriting broker steals from the company owners to pad their freinds’ pocket and gets a huge commission for their trouble and quite a few shares for themselves to sell.

© Joe Schmoe can now buy those shares once they are flipped at hype market price. If he holds them too long, the frenzy die down and he may actually lose money. That’s ok, it went to a good cause, the poor starving brokers of Wall St.

Going public generally allows a startup’s owners to cash in, (or cash out). There are limits to what you can do with shares if the company is ont publicly traded, but certainly you don’t get a feel for real value. What good is owning, say, Google or Pets.com if everyone says “wow, you could be a bilionaire” but you can’t easily sell any shares?

Theoretically the Joe Schmoes who own shares elect the board, but barring a huge social movement (I.e. “Let’s go green” or “dump the bum!”) generally board activity is a gentlemen’s game among the large collection of banks, mutual funds, pension funds, etc. that own most of the shares. Unless they seriously screw up, the company’s executive call the shots. A mutual fund, for example, can’t really push an agenda since their mandate is to maximize investor value. If they raise shit about a company they hold shares in, it better be in order to make the shares worth more. “Get out of South Africa/ Sudan / Burma”, “Free Tibet” or similar activist actions don’t usually meet this test.

OtOH, there were a number of reverse actions, especially in the 1980’s - take a public company private, assuming the market value of the shares is much lower than the company’s actual worth. (Read “Barbarians at the Gate”) A&P, Greyhound, or Woolworths, for example, used standard accounting rules to tally their property holdings. Often these were priced in 1920’s dollars for substantial downtown properties. Coupled with declining business, this meant that sellers of the stock may not realize that there was a lot of money to be made by breaking up the company.

The laws governing companies generally are much more restrictive for public companies - tranparency and governance rules, publishing public statements and verifying their accuracy. Besides having no restrictions on paying yourself as owner, private companies are much freer from government hassles.

Governance structure - public, private, etc. - is a byproduct of a few forces, including the type and size of the company, the type and size and frequency of capital you need to access to execute your strategy, the upside potential available across different stakeholder groups (e.g., shareholders, leadership exec’s, personnel) and the type of management control desired by leadership.

“Going Public” via IPO is typically intended to be a situation where a company is small, wants to get bigger and is generally thought to be undervalued because what it does is considered compelling and something that would appeal to a larger customer base (hence the need to get bigger). The fact that founders/exec’s with options or shares make out HUGE when that happens is meant to be a byproduct of capital forces at work - the company is going public to access the power of public financial markets; the fact that the shareholders are getting a bit of cream with that was a byproduct. With the dot.com boom, IPO’s just became a new form of “striking gold” and getting lucky (if you are employee #27 or something) - but they serve a real function in the growth of a company, and updated accounting practices on declaring grants and options have tried to tighten that up…

There is NO “better” structure - I know of companies that are private looking to go public; I also know of public companies that are better-suited to being private - they can tolerate losses better while they go through turnaround or build a bigger base of business on which to grow their company.

Being public gives a company access to capital via the public market. Need more capital…issue more shares. But being public means that you are at the mercy of Wall Street analysts, whose point of view is very short term (1-2 quarters). Their point of view has a strong impact upon the market value of the company’s stock and how many shares have to be issued in order to raise more capital if needed. The Street also put’s a lot of pressure on management to deliver short term results.

Being private limits the amount of capital that can be raised. But it provides management (assuming the shareholders are aligned) an opportunity to focus on long term growth and returns. Many privately held companies have significantly higher returns on their capital than public companies because of this long term view.

That depends a lot on the company. Some have extremely detailed boards who investigate everything (sometimes far exceeding good sense), andare known to lean on CEO’s who defy them. Some have boards which look over and approve of the strategy, but otherwise leave things alone. Some are basically nonexistent boards and do virtually nothing. It just depends on the charter and culture.

There are certainly advantages to remaining private. Information flow is a big part of it. Public companies must report their financials every quarter, whereas private companies don’t. It can take a public company a long time to make a major change that a single-owner company can make in seconds.

It varies wildly from company to company, but traditionally, the board of directors hires and fires presidents.

In my opinion, making the quarterly numbers can become ridiculous. Even if a company publicly announces that it expects to achieve earnings of, say, ten cents per share, the Wall Street analysts may have projected a higher number (the whisper number) of, say, twelve cents per share. So if the company’s real result is eleven cents per share, its stock price might fall even though it achieved the number it projected. That seems crazy to me.