The pros and cons of going private: going private is not a panacea for an ailing public company, but there is no question that the downsides of being public, especially for a small company, may be bigger than ever.

• Author: Sinnenberg, John
• Position: Private companies

When Regulation Fair Disclosure took effect in October 2000, the term "safe harbor" was coined to describe the language that public companies now routinely use to qualify forward-looking statements. Who could foresee the rough waters that loomed ahead for those public companies, especially small-cap and mid-cap companies?

Now, in the wake of The Sarbanes-Oxley Act of 2002, the cost and exposure of being a public company has never been higher--due to the dramatically increased regulatory, insurance and compliance costs, the surge in shareholder litigation and the overall decline in the public markets. These same small public companies may have little to no research coverage and are trading at historically low multiples, with little trading activity in their stocks. The result: It's no wonder that many companies find it once again appealing to return to the calm waters of being a private company in order to grow.

A "public-to-private" or "going-private" transaction enables a company or an investor group that may or may not include existing shareholders to acquire all or substantially all of the publicly held shares of stock of a company in order to take the company private. By going private, the company eliminates public ownership of the stock, de-lists from the public exchange on which its stock is traded and eliminates the need to comply with federal disclosure and proxy requirements.

A going-private transaction commonly takes the form of: 1) a merger, whereby the parties execute a merger agreement and the company sends its stockholders a proxy statement soliciting votes on the merger; 2) a tender offer, whereby the acquirer purchases shares directly from the public company's stockholders; or 3) a reverse stock split, in which the public company solicits shareholder approval to amend its charter to provide for the combinations of a larger number of outstanding shares into one share, and then cashes out the small holders that are left with only fractional shares.

Why Go Private?

These days, small and mid-cap companies bear disproportionately high costs and risks associated with having publicly traded securities. According to various studies, the costs of compliance for public companies have grown 130 percent since 2001, and are expected to keep increasing in the near future. Due to the Sarbanes-Oxley regulations and increases in shareholder litigation, many smaller companies will spend between $1 million and $2 million for legal and...