Deretailization:
“Going Private” or “Staying Public”?
Prof. Alan Palmiter
Wake Forest School of Law
“Going Private” Conference
Brooklyn Law School
Feb. 29, 2008
“Going private” phenomenon
[Thanks to Prof. Robert Bartlett, U Ga]
What is “going private”?
DISCLOSURE
Public
OWNERSHIP
Public
Private
Private
Why go private?
Attractions twofold: money and freedom.
Money
• CEO pay can be “outrageously good”
• CEOs have freer hand to do tough but
necessary things for long term / less focus
on quarterly results, placating public Shs
Freedom / flexibility
• Less annoyance from the Sarbanes-Oxley
Act
• avoid SEC “excruciating detail” of pay to
highest-paid executives at public companies
• dodges another nuisance: activist hedge
Feb 27, 2006
US markets going private…
Going-Private Transactions as a Percent of Public Company
Acquisitions
35%
Enactment of SOX
30%
25%
20%
15%
10%
5%
0%
1998
1999
2000
2001
2002
2003
2004
2005
2006
% of Public Company Acquisitions
(by transaction value)
US markets going private…
Going-Private Transactions as a Percent of Public Company Acquisitions, 1998-2001 &
2003-2006 (by transaction value)
Enactment of SOX
35.0%
Going-Private
Transactions
where
Surviving Firm
Files SEC
Reports
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
1998
1999
2000
2001
2002
2003
2004
2005
2006
Going-Private
Transactions
where
Surviving Firm
Does NOT
File SEC
Reports
Source of funds
Sources of Funds - U.S. NonFarm, NonFinancial Corporate Businesses
120%
100%
60%
Net Equity Issues
40%
Debt Instruments
20%
Internal Funds
0%
-20%
-40%
Year
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
-60%
1987
% of Total Sources
80%
Pendulum?
Trading / disclosure
• Going (staying) private
• “Eclipse of public corporation”
Ownership
• Institutional investors
• “Deretailization”
Copyright © 2007, Securities Industry Financial Markets Association
Deretailizatio
n
100%
75%
50%
Institutions
Households
25%
0%
1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2006
* Households includes nonprofit organizations
Source: Federal Reserve Flow of Funds Accounts
Deretailizatio
n
100%
100% institutional
in 2033
75%
50%
Institutions
Households
25%
0%
1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2006
* Households includes nonprofit organizations
Source: Federal Reserve Flow of Funds Accounts
Requiem
for the retail
investor?
Retail ownership
(brokerage accounts / % US population)
120,000,000
40%
Accounts
100,000,000
35%
Accounts
30%
% (population)
80,000,000
25%
60,000,000
20%
15%
40,000,000
10%
20,000,000
5%
0
0%
1980
1985
1990
1995
2000
2005
Sources: SEC Office of Economic Analysis
US Census Bureau
Retail ownership
($ v alue / % GDP)
12,000
120%
Value ($)
100%
GDP (%)
8,000
80%
6,000
60%
4,000
40%
2,000
20%
20
05
20
00
19
95
19
90
19
85
19
80
19
75
19
70
19
65
19
60
19
55
0%
19
50
0
19
45
Billions ($)
10,000
Sources: Federal Reserve Flow of Funds Accounts
Bureau of Economic Analysis
Vanishing
public markets?
Listed companies
(NYSE, AMEX, NASDAQ)
10,000
9,000
8,000
7,000
6,000
20
06
20
04
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
5,000
Sources: Federal Reserve Bulletin, NYSE
Listed companies
(NYSE, AMEX, NASDAQ)
10,000
9,000
8,000
7,000
6,000
SOX
20
06
20
04
20
02
20
00
19
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
80
5,000
Sources: Federal Reserve Bulletin, NYSE
Public US underwritings
4,000
Debt *
Billions ($)
3,000
Equity **
2,000
1,000
0
1985
1990
1995
2000
2005
* Includes straight corporate, convertible, asset-backed, MBS debt
** Includes preferred stock, common stock
Source: Thomson Financial (excludes best-efforts deals)
IPOs
(not including closed-end funds)
80
Billions ($)
60
40
20
0
1985
1990
1995
2000
2005
Source: Thomson Financial (excludes best-efforts deals)
IPOs
(not including closed-end funds)
80
Billions ($)
60
40
20
SOX
0
1985
1990
1995
2000
2005
Source: Thomson Financial (excludes best-efforts deals)
“Dark matter”?
Total US offerings
(public vs. private)
100%
80%
60%
40%
Private placement
20%
Public underwriting
0%
1985
1990
1995
2000
2005
Source: Thomson Financial
Total US offerings
(public vs. private)
100%
80%
Leveraging
60%
40%
Private placement
20%
Public underwriting
0%
1985
1990
1995
2000
2005
Source: Thomson Financial
Institutionalization
(and future of private markets)
Institutional equity ownership
($ valiue over time / % of total market 6,000
5,000
2006
4,000
P ens ion funds (2 3.1 %)
Foreign ins titutions (1 3 .7 %)
3,000
I ns uranc e c os (7 .9 %)
Broker/dealers (0 .9 % )
State/loc al govts (0 .5 %)
2,000
Financ ial ins t's (0 .3 %)
1,000
0
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00
20
02
20
04
20
06
Billions ($)
M utual funds (2 6 .9 %)
Source: Federal Reserve Flow of Funds Accounts
Reports of my death …
The end