Going Private

During stock market slumps, many a corporation president entertains the Mittyesque dream of buying his entire company back from the public. Now stock prices have dipped so low, even while corporate profits generally perk higher, that some firms can actually afford to do it. Most are small companies that went public during the go-go '60s, when joining a booming market was an excellent way to raise capital and also provided the means--through attractive stock options--for luring talented executives. "Now every motivation seems to have gone away. Probably 80%-90% of the over-the-counter traded companies should not be publicly held at all," says Randall Fields, a California consultant who is advising companies to return to private ownership.

By taking such advice, a small company gains several benefits. It escapes the cost of undergoing audits, issuing annual reports and filing information required by the Securities and Exchange Commission. It avoids wrangles with shareholders over corporate strategy. And it can keep secret such information as its annual sales and profits, and the salaries paid to executives.

Wally Findlay Galleries International, Inc. is one firm that needed no urging. Findlay, a Chicago-based art dealer with sales of $9.5 million a year, went public at $13.50 a share in 1969.

The price reached $18.25 in 1970 but then skidded to a paltry $3 or so in 1973, even though earnings, at 86-c- a share, were at a near record. The company offered $6.70 to buy back shares. Other companies that have taken the same backward step include Ad Press, a New York printing house with sales of $7.5 million a year, that went public at $15 a share in 1969 and paid $3 a share to buy back stock that had slipped to $2.25 in the market by 1973; and Houston-based Diversified Design Disciplines, Inc., an architectural and engineering firm (annual income: $9 million) whose stock was initially offered at $12.50 in 1972 and has since sunk to $4.50. The company says that it will try to repurchase the shares for $7 each.

"Small companies need the flexibility of being privately held," says Robert Varner, president of Varner-Ward Leasing Company, a San Francisco business (annual sales: $5.6 million) that went public at $9.50 a share in 1964. In 1971 it turned down a dubious acquisition that Varner concedes "would have made our stock look like the fair-haired boy of the market." Another company did make the purchase, and the price of its stock shot up -- temporarily. Varner-Ward shareholders were outraged. If the firm had stayed private, Varner would never have been under any pressure. Finally, Varner and four associates decided to buy the company back. Though the stock was trading at less than $2, they paid $3.25 "to leave a good taste in stockholders' mouths."

Worth More. Such noblesse oblige, however, is not the only reason that companies going private offer above-market prices. Obviously, stockholders do not have to sell, and some are reluctant to part with their shares for a fraction of their onetime value. Merle Norman Cosmetics Inc. of Los Angeles (sales: $28 million) offered $13 a share for stock that was first sold publicly in 1969 at $25 and later rose as high as $32.75. But 90,000 of an original 740,000 shares are still publicly held, and dissidents who believe that the stock was worth more than $13 -- although the market price had fallen below $7 -- are suing to block the repurchase.

Fortunately for company managers, they do not have to persuade every last stockholder to let go of his shares. By federal law, once a company has fewer than 300 outside stockholders it is released from most SEC reporting require ments. The holdouts are then under pressure to sell since there is a greatly reduced market for the stock.

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