Case study
Webhire Chooses Privacy

by Ian Giddy, New York University

Webhire 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.

Going 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."

But for 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.)

Webhire's 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."

In 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."

That's 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.

Deregistration 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.

It's still 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."

Indeed, 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? | | | | contact
Copyright ©2005 Ian H Giddy. All rights reserved.