Secret agent Austin Powers and his corrupt nemesis Dr. Evil (a.k.a. actor Mike Myers of Austin Powers: International Man of Mystery) were frozen in the 1960s, then thawed back into action in the 90’s, where both encountered a huge culture shock. Dr. Evil was surprised that $1 million wasn’t a lot of money anymore, while Austin Powers had a tough time adjusting to dating without “free love.”

I know that Mike Myers has written his own Austin Powers sequels, but I think he’s overlooked an opportunity: my version of the next Austin Powers movie which would have Powers and Evil both becoming business executives who lead huge public conglomerates in 1999. My screenplay has them frozen again to avoid destroying each other in a hostile corporate takeover. When they are thawed in 2003, Dr. Evil faces fraud charges in a Securities and Exchange Commission investigation, while Austin Powers wants to cash in his stock options to live a life of leisure on a tropical island.

However, both of them are in for another culture shock. It had been really groovy to be a public company in the ‘90s, while the bull market roared and everyone was getting richer by the minute. But now they learn about the bursting of the dot-com bubble, when everyone finally concluded that a company isn’t real without real assets. And about corporate scandals and the collapse of Enron, Worldcom, Global Crossing, et cetera, when
everyone realized that profits have to be real, not just figures on paper. Finally, they learn about the economic
slowdown and the tragedy of September 11 and how the world became unsafe and unsure of itself, further
contributing to the economic malaise.

Suddenly, Dr. Evil and Austin Powers are leading companies with market caps of less than $150 million and stock trading below $10. Neither company is getting analyst coverage. Poor Austin Powers is not nearly as wealthy as when he was frozen in 1999. And everyone can feel compassion even for Dr. Evil, who pays his attorneys and auditors hundreds of thousands of dollars for work associated with the SEC investigation and with new disclosure requirements under the Sarbanes-Oxley Act.

Then my screenplay takes on a new twist. The charming Ms. Kensington, who serves on the board of Austin Powers’ company, tells him that she had read a great article in Twin Cities Business Monthly about public companies going private through a management buyout of public shares. “Oh shag me, baby!” Powers replies. A going-private transaction, she explains, allows a company to give a fair cash price to its shareholders for their stock, while the management team gains an equity stake in the company, more flexibility in implementing its vision, freedom from a regulatory environment, and liberty from the pressure to meet quarterly earnings expectations and from the expenses associated with public reporting requirements. Perhaps Austin’s company should consider going private? “Groovy, baby,” he says, laughing.

I think this has all the makings of a smash hit, don’t you? I’m sure Hollywood will be calling soon to begin negotiating for rights to the screenplay. I'm so excited!

Masterminds

To be sure that my screenplay is realistic, I did some research on public companies going private, talking to
several local expert attorneys and accountants. Hmmm…maybe I shall call them…Mini-Mes? As a group, they
are skeptical about my chances of winning an Oscar for the screenplay, but they did agree that in certain cases, it makes sense for public companies to go private.

Mark Williamson, a principal with Gray Plant Mooty who practices in the areas of corporate and securities law, says that more small and medium-sized public companies are discussing going private. “In recent months, we’ve been contacted by a number of companies who are considering it,” he says. This trend is being seen nationwide as well as locally. Financial Executives International reported in its March/April 2003 issue that the number of companies going private is increasing, while the number of companies going public is decreasing.

The bear market is a major factor contributing to this trend. The stock of many public companies is undervalued relative to their assets or earnings; small- and mid-cap companies are being left behind by investors who can buy the shares of large-cap companies with less risk. These left-behind companies are called “orphans”, forgotten and lost in the noise of the markets – virtually nobody is trading their stock and no analysts are investing time in them anymore. In fact, securities firms estimate that less than 20 percent of all public companies
get analyst coverage.

“It’s a cyclical event that orphan companies get into,” says Williamson. “They have a low market cap so they are not able to attract institutional investors. And because they can’t attract those investors, they can’t attract analysts. The biggest issue is the lack of a market, and it’s a problem that’s getting worse, not better, for small-cap companies.”

Tom King of Fredrikson & Byron, a specialist in securities law who is also chairman emeritus of Fredrikson & Byron’s board of directors, says, “In the past three years, the number of public offerings has substantially fallen off. Even if you are able to go public, it used to be that a $10-$20 million offering was okay.But now underwriters don’t want to do a deal unless it’s at least $50 million. Underwriters are looking at their market activity afterward. They’re looking at it from their financial perspective.”

While most public companies have seen a 60-80 percent market reduction in their stock value, they still have the reporting obligations of being public. As King says, “They’re paying a lot of money to be public and aren’t getting the benefit. You can be a nice manufacturing company with a 10-15 percent revenue growth and be cash flowing. But your stock can languish for years, because the company isn’t showing the significant 20-30 percent revenue growth that gets attention from analysts and institutional investors.”

It’s a Drag, Baby

Another factor that is leading public companies to go private is increased scrutiny under the Sarbanes-Oxley Act. Signed into law in July 2002, the act’s intention is to counter the corporate fraud and accounting scandals that were perpetrated by a few thugs and monopolized newspaper headlines last year.

I personally don’t believe you can legislate corporate behavior to avoid personal greed. Nonetheless, Sarbanes-Oxley Act promulgates new regulations regarding the structure and role of the audit committee of a board of directors. It also requires the company’s chief executive officer and chief financial officer to certify that their 10-K and 10-Q filings with the SEC “fairly present, in all material respects, the financial condition and results of operations of the issuer.” If the filings are found to be otherwise, the law spells out harsh penalties for the company’s executives.

In addition, Sarbanes-Oxley puts restrictions on the types of services that audit firms can provide to public clients, and it requires audit committee members to be independent board members who have no prior relationship to the firm. The audit committee must also have a financial expert among its membership. Why do we need all these new laws? In my screenplay, Austin Powers would just say, “Oh, behave!”

"As a result of the act, public companies are subject to much more public scrutiny, and reporting and disclosure obligations have become more burdensome,” says Williamson. They’re also subject to increased expense associated with more SEC filings, audits, directors and officers insurance, and the like. “The cost of premiums for directors and officers insurance has doubled or even tripled in the past year for many companies,” he adds. “And, boards are having trouble finding qualified directors who meet the requirements for independence and who are willing to take on additional exposure.” There’s this too: Board members who were content to be
compensated with stock options in the ‘90s – hoping to be on the board of the next Microsoft – now want higher
directors’ fees, instead.

Public companies have told our firm that their costs for compliance with SEC and NYSE or Nasdaq requirements can be upwards of $8-10 million for a Fortune 500 company with $3-5 billion in sales. Smaller companies, in the $20-50 million revenue range, have told us they spend about $1 million annually – that’s a lot of dough, baby!

Screen Tests

In general, public companies that are good candidates for going private are those with:

• Market capitalization of less than $125 million and trading prices of less than $10 per share,
• Undervalued stock relative to assets and earnings,
• Minimal or no analyst coverage,
• An excellent management team with high percentage of stock ownership,
• Low daily trading volume, or “float”,
• Leading market position with good growth prospects,
• Unhappy investors.

Thomas Walters, managing partner of Grant Thornton’s Minneapolis office, adds another criterion to the list: inadequate liquidity. That’s where the value of the company has decreased due to poor earnings and a low
stock price, where the number of public shareholders is small, or where the company went public expecting
extraordinary success that didn’t materialize.

Walters says, “There are a lot of facts and circumstances to consider, and it’s not usually one single issue, but a combination of factors, that will cause a company to decide that it is the right time to go private.”

In addition, says King, “If a public company finds itself in the predicament of the market refusing to recognize its value, and there is no real prospect for this situation to change, the board of directors of that company has an obligation to look for another exit strategy for its shareholders.” The inability of shareholders to sell their stock, even at modest values, because of a lack of trading activity is another reason to look for an alternative liquidity event, which could be selling the company to a strategic or financial buyer in a going-private transaction.”

Plot Lines

A going-private transaction is one in which a person or a small group of investors (many times, a management
group) purchases all of the outstanding shares of a public company, or just the public shares. They do this either
by forming a new company and engaging in a merger to take out all the public shares, or through a tender offer,
in which the investors offer to buy back the stock of all public shareholders. In a merger, shareholder approval
will be required, and shareholders will have the right to oppose the transaction. A tender offer does not require
shareholder approval, but it also does not ensure that all of the shareholders will accept the offer. Generally,
buyers don’t undertake a tender offer unless they expect that at least 90 percent of the shares will be tendered.
The formal process required by the SEC is to file a Schedule 13E-3 statement.

Typically, the transaction results in an affiliate that acquires all of the stock of the public company, usually with outside financing. Equity funding for buyouts is often provided by equity funds that invest on behalf of institutional investors and wealthy individuals, while debt funding is provided by commercial banks or the issuance of high-yield debt (junk bonds). The entire going-private process usually takes between six and 12
months to complete.

Another less-used way to go private is to file a Form 15 with the SEC, which allows a company with fewer than 300 shareholders to de-register its securities, thereby becoming a private company. However, this method leaves public shareholders understandably less satisfied, because there is no liquidity event. Watch Out for Fembots!

Austin Powers is always watching out for Dr. Evil’s undercover fembots (feminine robots that distract him with
their beauty). In my screenplay, some fembots that could derail Austin Powers’ plan to take his company private
are:

• Not having enough cash. The major obstacle for public companies that want to go private is that age-old problem, cash. They have to come up with enough capital (equity, debt, or a combination of both) to buy out the shareholders, or find a strategic investor or financial buyer that sees the potential of their undervalued company.
• Not satisfying the “business judgement” rule. Boards should follow a careful process to examine all alternatives available to the company and be sure that going private is the best thing to do, based on the company’s performance and the marketplace. They should not overreact to the bear market or to being undervalued. Because going-private transactions can become litigious and are held to a high standard of review by the SEC and other observers, it’s important that companies considering going private have an independent committee of directors – who are not involved in the proposed transaction – that determines whether the transaction is fair and in the best interests of the shareholders. They should retain legal and accounting advisors and an nvestment-banking firm that understands the complexity of these transactions. The special committee will negotiate with the investor or management group that is taking the company private. By separating those who make the decision from those who could benefit from going private, a company can avoid conflicts of interest.
• Not getting a fairness opinion. To satisfy the higher level of review, companies going private should use the services of an investment bank to get a “fairness opinion” as to what price they should offer for the stock they are buying back.
• Not knowing the shareholders. Research the shareholder base to find out, for instance, whether large portions of the company’s shares are owned by institutional investors and what price they were bought at. In the current bear market, institutional investors are willing to be bought out at a loss now, rather than sitting on their shares until their loss is even greater later. In fact, some going-private transactions are the result of institutional investors wanting an exit strategy. On the other hand, if the company has had wide volatility in its stock, and has a large number of individual investors who bought at a wide range of share prices, it may be difficult to get those shareholders to agree to a deal.

The Grand Finale

Austin Powers and Dr. Evil always wind up battling to destroy each other. Austin Powers wants to prevent Dr.
Evil from taking over the world, while Dr. Evil wants to destroy Austin Powers just because he’s a bad guy. But
in my screenplay, I let Austin Powers take his company private so that he and Ms. Kensington can live a life of
leisure on their tropical island – even if it’s not on the grand scale they had imagined in 1999. And I let Dr. Evil
escape once again in his time-travel machine after being rescued from his SEC investigation by a whole army of
fembot securities lawyers and accountants.

Wait a minute, is that my phone ringing?…Hello?…Hello Hollywood???…Yes, this is Mark...