Another Benefit of Deflation: Companies Going Private


Best Buy, The New York Times, and Chinese elevator-television maker Focus Media are all reported to be considering or in the process of going private – selling their shares to private investors who will then manage the companies without the trouble and scrutiny of the stock exchange.

All three companies have been brought to the brink of privatization by the healthful shift toward value that is occurring in the American economy despite the best efforts of the Washington/Wall Street axis. 

Best Buy, a subject of countless business obituaries, is now a target to be taken private by founder Richard Schulze. According to USA Today's Matt Krantz

Schulze is offering $24 to $26 a share for the company, which before the bid, was trading for $17.64 a share. The deal is far from done, as the company must not only approve the offer, but Schulze must line up all the financing to pay for it.

The move is [an] effort to save what was once a powerful force in consumer electronics, but has lost ground amid competition from Internet-based rivals, such as (AMZN). The company reported a net loss of $1.2 billion in the 12 months ended March, the latest data available from S&P Capital IQ.

Meanwhile, as noted earlier at Reason 24/7, Bloomberg's Edmund Lee is speculating that the parent company of The New York Times may retire from the hurly-burly of Wall Street (the company has seen its valuation fall by $7 billion since the beginning of the 21st century) and return to family ownership: 

"Now would be a good time for the company to go private," said Reed Phillips, managing partner and co-founder of DeSilva & Phillips, a New York-based investment bank that focuses on the media industry. "The Times and other print newspapers are at an all-time low in valuations. They have been 'cleaning up' the business by selling off orphan assets for some time now."

And Shanghai-based Focus Media, which markets flat-panel advertising displays in elevators, movie theaters and other locations, is looking to leave NASDAQ with a pan-galactic investor group that includes Carlyle Group, China Everbright and Focus Media CEO Jason Nanchun Jiang. Focus Media has seen investors turn bearish after a negative report on its bookkeeping practices by Muddy Waters LLC. 

Focus Media is one of 19 Chinese companies looking to leave the American stock market this year. Thirteen did so last year. T.H. Capital Research analyst Tian Hou tactfully tells The Deal Pipeline's Chris Nolter that U.S. investors need to get with the hyperinflation program: "If the negative sentiment against Chinese stocks in the U.S. markets doesn't change," she says, "we are going to see the trend continue."

I say let it continue – if it actually is a trend. (Krantz notes that the number of privatizations is actually below where it was at the start of the credit unwind, pointing to "the reluctance of lenders to take chances.") 

In the Keynesian universe, a trend toward taking companies private would be catastrophic. On planet Earth, not so much. It's true that a private company lacks access to the big capitalizations available in the public markets. But it also gets away from the stupidity of crowds and has a better chance of understanding what amount of value it's generating. Better that all these brands get a fighting chance under management by investors who have some stake in the outcome of the company. 

To be clear: Other than Focus Media, I'm not sure these companies have much of a chance in any case. If Reed Phillips believes "print newspapers are at an all-time low in valuations," I'd advise him to wait six months. Best Buy's secular and cyclical problems are familiar enough that I don't need to recite them here (though as an occasional Best Buy customer I would rate my experience as fair to good). 

But that's the point. Schulze and Jiang and the Sulzbergers deserve a chance to try and make money without having to lie to Wall Street about how much potential they have. If there has been one shining lesson of the last six years, it's that we are all, individually and collectively, worth far less than we were led to believe. That goes for companies, it goes for employees, it goes for cities, counties, states and nations, aunts, uncles, nephews, nieces, pills, planes and artillery pieces. 

In that environment it's more merciful to be managing a business without having to go through the overvaluation process that – at least since the dotcom boom – has become the public market's reason for being.

I don't want to get nostalgic for the best practices used by our founding fathers under the buttonwood tree, but one habit with relevance to the private/public company question has vanished entirely within the last 20 years. It used to be that when you did the opposite of what we're talking about here – when you took a  private company to the stock market for the first time – shares were supposed to close the first day of trading at about where they were when the trading started. If shares went up sharply after the IPO, that meant the deal had been undervalued. 

During the dotcom boom this was reversed, and an IPO was supposed to see double-digit gains in its first day in the market. A generation of Henry Blodgets got rich mooning about the red-hot performances of newly issued tech stocks when the only sound you should have been hearing was the IPO's underwriters howling about all the value they'd lost by not pricing shares higher in the first place. (That Goldman Sachs and other IPO giants didn't howl tells you that at some level they understood what massive swindles they were perpetrating.) 

That mentality never really went away, even in hard times.  A newspaper monopoly can still be a profitable enterprise, yet in the public markets it will never be anything but a dying business. Add the federal attention you get from the SEC and whatever new jackbooted authorities Dodd-Frank has created and you have a good question for Mark Zuckerberg and other recent IPO washouts to ponder: Why would anybody want to be in the stock market at all? 

By the way, I'm speaking against self-interest. As a reporter it's much easier to deal with publicly traded than privately held companies.