Public Companies Opting for Private Lives

Nov. 27, 2006 — -- It's been a tough few years for Jack Bovender, the chairman and CEO of HCA.

HCA, the nation's largest for-profit hospital chain, has struggled with sinking earnings and escalating expenses. Its third-quarter earnings fell 14 percent last month. Former Senate Majority Leader Bill Frist became the target of a federal inquiry after he sold his HCA shares shortly before the stock plunged 15 points last year. And Bovender's own multimillion-dollar pay package has come under fire, dividing the company's board of directors.

And all that drama has taken place on a public stage in front of thousands of shareholders, subject to the scrutiny of federal regulators and the media.

So when Bovender and the company's execs took the company private last Friday, not many Wall Street observers were surprised.

HCA, by accepting a $21.3 billion buyout from a consortium of private equity firms that included Bain Capital Partners LLC, Kohlberg Kravis Roberts & Co., and Merrill Lynch Global Private Equity, abandoned the stock exchange and the exposure that comes with being a publicly traded company.

HCA has plenty of company. In just the last week, Equity Office Properties Trust, the nation's largest publicly traded office-building owner and manager, was snapped up for $19 billion by the Blackstone private equity group; Reader's Digest was bought for $1.6 billion by Ripplewood Holdings; and Vivendi was made an offer of $50 billion by KKR.

The trend is remarkable in its speed and size: In five of the six biggest mergers and acquisitions this year, the buyer was a private equity firm.

Out of $1.3 trillion in deals so far in 2006, these firms accounted for $346 billion, or 27 percent of them. That's almost triple last year's total of $119 billion.

So, what's behind the push to go private?

"In general the reason that so many of these public companies go private is that their CEOs are wary of Sarbanes-Oxley and all the new regulations and attention placed on publicly traded companies," said David Snow, the U.S. editor of Private Equity International.

The Sarbanes-Oxley Act, passed by Congress in 2002 after Enron and other corporate scandals, forces publicly traded companies to adhere to strict governance rules. By some estimates, it costs an average $3.8 million per company to adhere to the law.

"Many executives feel that they can do a better job managing their company as a private firm," said Snow. "They can make better long-term decisions without getting punished on the stock market for short-term disruptions. And … they're not forced to explain every quarter with shareholders breathing down their necks and questioning how much they make."

Typically, private equity firms snap up distressed companies with a little of their own cash and borrow the rest of the funds. After three to five years of restructuring, they sell them at a huge profit to a buyer or take it to market again in an initial public offering.

There are some risks inherent in the transition. Since private equity firms tend to take on large amounts of debt to finance their buyouts, the company spends years servicing that debt. And that squeezes their ability to generate cash flow.

Also, some top CEOs have a difficult time adjusting to the new environment. Whereas executives who run publicly traded companies can get by with strong people skills, the private equity world tends to be more demanding and reward entrepreneurial, innovative thinkers.

In the last few years, the private equity behemoth has swallowed up large pieces of major sectors of the economy from real estate and technology to health care and media. From 2004 to 2006, the share of real investment trust deals that were public-to-private increased from 2 percent to 57 percent.

The trend should continue, especially on a global scale.

"The interest in private equity is working its way around the globe, especially as companies go through restructuring," said Chris Ullman, spokesman for Carlyle, one of the largest private equity firms. "The U.S. has already gone through a lot of restructuring, and Europe and Japan are just starting to go through it. That represents great opportunities for private equity. The same is happening with real estate -- it's just heating up in Europe and Asia."