In a recent article in Business 2.0 “Why it pays to be Private,” Jeffrey Pfeffer, Professor of Organizational Behavior at Stanford University’s School of Business, makes an interesting case for why companies should consider abandoning the public markets. According to Professor Pfeffer’s observations management spends countless hours meeting with analysts, speaking and meeting with major shareholders and attending investments conferences.

In just the month of August the NASDAQ 100 witnessed about 20% of their companies abandon the public markets. According to Lehman Brothers, since 2003, 40 public companies with valuations over $400 million have initiated or completed privatization deals. Through the first half of 2006, Goldman Sachs reported leveraged buyout activity accounted for 11% of all merger and acquisition deals, a 50% jump in volume from 2005. The same report stated that there are now 158 US private equity funds with assets over $500 million and an additional 96 with over $1 billion. There are now over 2,000 companies that are controlled by the private equity firms.

This trend seems to be the result of three main factors:

1.) The “hassle” of being a public company. This includes the costs of Sarbanes Oxley, higher risks of shareholder lawsuits and issues relating to the composition and size of the board.

2.) Money factors. This limits a company’s ability to leverage its capital structure. Additionally, new restrictions that are being imposed on CEO compensation packages will be the primary reason for top paid executives to take companies into the private sector.

3.) Running a business more effectively. Private companies do not need to disclose their financial results or sensitive information for rivals to analyze. They can also make long term plans to build long term value without worrying about having their stock punished in the short term.

With the new Democratic congress in place there is sure to be more legislation concerning CEO pay packages and protecting the small investor. This, I believe, will lead to the privatization of many more companies in the future. There have already been a substantial number of US companies that have fled the US markets for foreign exchanges.

There is something inherently wrong when executives cannot focus on the long term to raise the value of their enterprises. If the markets do not adjust their thinking away from “the short term mentality” and the SEC and other governmental bodies do not extend an olive branch to the public sector there will be no other alternative for companies but to take the private route.

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