Inc.'s stock was trading at 50 cents on Nasdaq when the company's
executives decided they'd had enough pummeling on the open market. The
Lexington, Massachusetts, company wasn't the first to get fed up with
the market's prolonged dry spell, but it wasn't just another late '90s
flash-in-the-pan start-up, either. Webhire, which makes Web-based
software for companies to manage their hiring processes, has been
around since 1982. Its financials were fairly solid: multiple straight
quarters of positive cash flow and sales in the $14 million range. But
its pitiful stock price and deflated market cap were enough to scare
away not just investors, but potential business partners and customers,
too. At the same time, the company was spending roughly $400,000 per
year on the document filing, legal work and audits required of public
companies. New Sarbanes-Oxley regulations would only add to the bill.
totally private, though, would have cost a small fortune as well, as it
would have required the company to do either a reverse split or a
tender offer to buy back all outsider stock, notes Steve Allison, the
company's CFO. "You need legal advice and a fairness opinion from an
investment bank, and then there's the cost of the transaction," he
says, adding that the company would have had to pay a premium over the
share price to avoid raising shareholder ire. "In these litigious days,
you have the danger of being sued."
Webhire, there was another way out, a kind of down-market purgatory
known as becoming "deregistered"-still public, but with a fairly
private life. According to current SEC rules, as long as a company has
fewer than 300 "holders of record" (one institutional record holder
could represent hundreds or thousands of individual shareholders but
still be counted as one), it can file a form with the SEC applying to
deregister and be almost immediately dropped from the exchange. The
stock moves over to the pink sheets, where it can be traded, should
anyone want to buy it, and the company no longer has to keep up with
all the SEC's onerous reporting requirements. (See the SEC's summary.)
deregistration was completed in March 2003, and so far, says CEO
Susanne Bowen, 42, it's been positive. "Not only did we achieve
significant cost-savings," she says, "but we've also had the
opportunity to enjoy the positive impact on cash flow and focus our
team on what we need to do to grow the business."
addition, Webhire avoided being delisted by Nasdaq. Philip Colbran, a
partner with New York City law firm Chadbourne & Parke LLP who
specializes in corporate finance and securities law, agrees that taking
the step voluntarily is far better than waiting for it. "Then you can
spin it the way you want to spin it."
exactly what Web-hire did. After getting buy-in from major
shareholders, the company positioned the move as a win-win for both
Webhire, which would no longer be burdened financially and
competitively, and for shareholders, who it said would maintain
liquidity and could hope for a better price on the stock in the future.
is really just a holding pattern, though. Eventually, the company will
have to tender an offer for shares and really go private, or sell the
company for a decent price if it wants to satisfy shareholders. As far
as the stock going anywhere, "I think once you file this, you're done,"
says John Cavallone, a principal with New York City accounting firm
Rothstein Kass & Co.
possible for deregistered companies to relist the stock again at some
point. Problem is, the meter continues to run from the time the company
deregisters. "So they'd have to get current on all their filings," says
Cavallone. In other words, if a company deregistered in 2003 and wanted
to get back into the public eye in 2005, it would have to do all its
quarterly filings and audits for 2003 and 2004. "It's very expensive,
which is why a lot of companies are opting not to be public."
more and more small or closely held public companies are seeking
shelter from the storm. According to The Wall Street Journal, 421 U.S.
companies had deregistered as of July, compared with 675 for all of
2002. Says Colbran, "It's certainly a move that more and more companies
are going to be looking at taking."
Source: Entrepreneur magazine, December 2003. By C.J. Prince
Cristy Lorenzo Parker, "Going Private."
1. What costs did Webhire save by deregistering?
2. How does this form of "going private" differ from a leveraged buyout?