Deretailization: “Going Private” or “Staying Public”?

“Going Private” ConferenceBrooklyn Law School

Feb. 29, 2008

Prof. Alan PalmiterWake Forest School of Law

“Going private” phenomenon

[Thanks to Prof. Robert Bartlett, U Ga]

What is “going private”?

Public Private

Public

Private

DISCLOSURE

OWNERSHIP

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

funds.

Feb 27, 2006

US markets going private…

Going-Private Transactions as a Percent of Public Company Acquisitions

0%

5%

10%

15%

20%

25%

30%

35%

1998 1999 2000 2001 2002 2003 2004 2005 2006

Enactment of SOX

Going-Private Transactions as a Percent of Public Company Acquisitions, 1998-2001 & 2003-2006 (by transaction value)

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

1998 1999 2000 2001 2002 2003 2004 2005 2006

Going-PrivateTransactionswhereSurviving FirmFiles SECReports

Going-PrivateTransactionswhereSurviving FirmDoes NOTFile SECReports

% o

f Pub

lic C

ompa

ny A

cqui

sitio

ns

(by

tran

sact

ion

valu

e)

Enactment of SOX

US markets going private…

Source of funds

Sources of Funds - U.S. NonFarm, NonFinancial Corporate Businesses

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Year

% o

f Tot

al S

ourc

es

Net Equity Issues

Debt Instruments

Internal Funds

Pendulum?

Trading / disclosure• Going (staying) private• “Eclipse of public corporation”

Ownership• Institutional investors• “Deretailization”

Copyright © 2007, Securities Industry Financial Markets Association

Source: Federal Reserve Flow of Funds Accounts

Deretailization

0%

25%

50%

75%

100%

1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2006

InstitutionsHouseholds

* Households includes nonprofit organizations

Source: Federal Reserve Flow of Funds Accounts

Deretailization

0%

25%

50%

75%

100%

1945 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2006

InstitutionsHouseholds

100% institutional in 2033

* Households includes nonprofit organizations

Requiemfor the retail investor?

Sources: SEC Office of Economic AnalysisUS Census Bureau

Retail ownership (brokerage accounts / % US population)

0

20,000,000

40,000,000

60,000,000

80,000,000

100,000,000

120,000,000

1980 1985 1990 1995 2000 2005

Acco

unts

0%5%10%15%20%25%30%35%40%

Accounts% (population)

Sources: Federal Reserve Flow of Funds Accounts

Bureau of Economic Analysis

Retail ownership ($ value / % GDP)

0

2,000

4,000

6,000

8,000

10,000

12,000

Billi

ons

($)

0%

20%

40%

60%

80%

100%

120%Value ($)GDP (%)

Vanishing public markets?

Sources: Federal Reserve Bulletin, NYSE

Listed companies (NYSE, AMEX, NASDAQ)

5,000

6,000

7,000

8,000

9,000

10,000

Sources: Federal Reserve Bulletin, NYSE

Listed companies (NYSE, AMEX, NASDAQ)

5,000

6,000

7,000

8,000

9,000

10,000

SOX

Source: Thomson Financial (excludes best-efforts deals)

Public US underwritings

0

1,000

2,000

3,000

4,000

1985 1990 1995 2000 2005

Billi

ons

($)

Debt *Equity **

* 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)

0

20

40

60

80

1985 1990 1995 2000 2005

Billi

ons

($)

Source: Thomson Financial (excludes best-efforts deals)

IPOs (not including closed-end funds)

0

20

40

60

80

1985 1990 1995 2000 2005

Billi

ons

($)

SOX

“Dark matter”?

Source: Thomson Financial

Total US offerings (public vs. private)

0%

20%

40%

60%

80%

100%

1985 1990 1995 2000 2005

Private placementPublic underwriting

Source: Thomson Financial

Total US offerings (public vs. private)

0%

20%

40%

60%

80%

100%

1985 1990 1995 2000 2005

Private placementPublic underwriting

Leveraging

Institutionalization(and future of private markets)

Source: Federal Reserve Flow of Funds Accounts

Institutional equity ownership ($ valiue over time / % of total market -

0

1,000

2,000

3,000

4,000

5,000

6,000

Billi

ons

($)

Mutual funds (26.9%)Pension funds (23.1%)Foreign institutions (13.7%)Insurance cos (7.9%)Broker/dealers (0.9%)State/local govts (0.5%)Financial inst's (0.3%)

2006

Reports of my death …

The end