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Updated 10:00 AM September 10, 2007
 

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When firms go private, predictors often obvious

Many factors that drive public companies to go private are evident throughout their public life — even at their initial public offering (IPO), say researchers at the Stephen M. Ross School of Business.

Using data from the time of the IPO to when a firm decides to go private, finance professors Sreedhar Bharath and Amy Dittmar are able to predict accurately which firms will become private about 83 percent of the time.

"On average, firms that ultimately go private remain in the public market for more than 13 years after their IPO," Dittmar says. "Despite this fact, these firms are very different and discernable relative to those that remain public.

"The results at the IPO not only provide evidence of the choice between being private or public, but also indicate that it is possible to determine the relative costs and benefits of being public early in the firm's public life. It seems that at least in part there is something inherent to the firm at the time of the IPO that determines if it will ultimately go private."

In the study "Why Do Firms Use Private Equity to Opt out of Public Markets?" Dittmar and Bharath examined 1,451 public U.S. firms that went private between 1980 and 2004, comparing them to 6,640 IPO firms that remained public during that time.

They found that companies that are more likely to go private have less coverage by stock analysts, fewer institutional holdings, greater concentrated ownership and more informed trading at the time of the IPO, compared to firms that remain public. This, they say, shows the importance of information considerations in the choice between being public or private.

In addition, firms that go private are less liquid and have less share turnover, which supports the importance of liquidity issues, they say. These companies also have lower capital expenditures, indicating fewer investments and less need for capital.

Moreover, going-private firms have lower market-to-book ratios, higher return on assets, higher leverage, less cash, more tangible assets and engage in fewer mergers and acquisitions than firms that remain public.

Bharath and Dittmar also examined the impact of market and macroeconomic forces on firms' decisions to go private. They found that the likelihood of going private increases significantly in high sentiment and hot private equity markets and decreases in hot IPO markets. Further, supply of debt in the economy and costs of bankruptcy may be influencing factors, they say.

To read the research paper, go to webuser.bus.umich.edu/adittmar/publicprivatepapermar132007.pdf.

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