Private attractions – For many company managements, the allure of becoming owners couldn’t be stronger.
By Justin Lahart, CNN/Money Senior Writer
NEW YORK (CNN/Money) – Somewhere in America right now there’s a CEO staring at the ceiling and dreaming of taking his bat and his ball and heading home.
What is the point, after all, of being a public company anymore? The stock market has not been kind over the past three years and increased regulatory scrutiny has made company heads spend more time bean counting and wading through legal problems than running their companies.
Meanwhile, with research departments getting pulled away from the sheltering wing of investment banking, many Wall Street firms see little point in covering lesser-known names in unsexy industries. Even with the stock market improving, many companies’ shares continue to languish.
“Who cares about a half-billion dollar business? It doesn’t matter,” said Paul Schaye, managing director at investment advisory firm Chestnut Hill Partners.
The appeal of going private is strong, and now the means to do it may be at hand. When company managers look to become owners, they typically turn to the leveraged-buyout — a transaction where they first buy the company and then turn around and finance that transaction by issuing debt. Usually this debt comes in the form of high-yield, or junk, bonds.
Until recently the junk bond market had been in sorry shape, making the cost of doing an LBO prohibitively high. But enthusiasm for junk bonds has been on the rise, with investors putting more money into high-yield funds like never before. As a result, spreads — the difference between Treasury yields and junk bond yields — have contracted sharply. And because Treasury yields have fallen, the absolute yields on junk bonds have fallen sharply as well.
“My gut tells me that spreads and yields are still too high to see a flood of deals,” said Kirlin Securities fixed income and economic strategist Brian Reynolds. “But if the market continues to improve, we will be at a point where a pickup in deals would be feasible.”
Like Schaye, Reynolds thinks the most likely companies to be taken private are the ones that equity investors find among the most boring, like midsize rust-belt manufacturers with steady earnings, but little growth.
If there is a move toward going private, it could be good for the stock market in general. For one thing, it would make investors much less willing to bet on stocks going down — the bear’s greatest fear is being caught short a company that is getting bought. Moreover, if company managements started saying they saw more value in their shares, investors might, too.
“It would boost confidence in the overall equity market,” said Smith Barney equity strategist John Manley. “The best statement a management can make that it believes in itself is for it to take the company away from you.”
— Justin Lahart is a senior writer at CNN/Money covering markets and investing.