Wednesday, January 5, 2011

What is a "private" company?

While tutoring a young man recently, I realized that not everyone is clear what the terms "public company" and "private company" mean. When studying for questions on issuing securities and the Securities Act of 1933, it would probably help to understand the fundamental concepts, so let's say a few quick words. A "privately held company" is simply a company that has not yet raised money from public investors. Virtually all companies start as private companies--picture Mr. Jobs and Mr. Wozniak in the garage back in the day. Successful private companies start out using their own savings and credit cards to fund operations then move up to lines of credit from the local bank and, eventually, perhaps funding from rich "venture capitalists" or "private equity groups." These multimillion-dollar and billion-dollar private equity/VC funds become owners of major stakes in these growing private companies. For example, maybe they give the next Groupon $5 million in exchange for 30% ownership. Eventually, these backers are going to want to cash in their investment, either by selling to another private company with deeper pockets or doing an IPO through investment bankers like Goldman, Merrill, etc. When they access the public markets, they suddenly have to disclose all kinds of things they used to keep, yes, private. For example, a business magazine can look up exactly how much revenue and net income a public company like Microsoft took in last year. For a private company, they would often have to estimate, since the owners aren't likely to share their private business with outsiders.
While some public companies are massive--WalMart, Microsoft, Apple, American Express--that does not mean that all public companies are either large or even profitable. It also does not mean that private companies are necessarily small. While reading Crain's Chicago Business yesterday, I read a list of the largest private companies in the area. Check out some of the familiar names on this list:
  • CDW Corp.
  • Ace Hardware Corp.
  • True Value Co.
  • Follett Corp (college textbooks)
  • Solo Cup Co.
  • Crate & Barrel
  • Culligan International
  • Nuveen Investments (closed-end funds, e.g.)
  • Mesirow Financial Holdings

How much revenue do these companies make? Mesirow has the lowest among that group, which is still about $467 million a year! Another way to look at is that my office is about 100 yards from a privately held company called Ferrara Pan Candy Co. They make Lemonheads and other famous candies. They also did $322 million in revenue last year, making them only the 89th largest in the Chicago area . . . bigger than the Chicago Bears Football Club Inc. or Safeway Insurance.

Will these companies ever go public? Maybe. Or, maybe they don't need to and/or don't find it worth the hassle of filing registration and listing statements, quarterly and annual reports, etc. In any case, when we talk about "public companies," we simply mean those companies that have accessed the public markets by selling securities to finance their expansion. To make things a littler trickier, many public companies later get taken private again. For example, the Tribune Co. used to be a public company but is now the 10th largest private company in the area after Sam Zell, real estate mogul, put together a complex leveraged buyout. A "buyout" occurs when a group of private investors figures out a way to purchase the shares of a public company, often at a premium to their market price. For example, Zell's Equity Office Properties was a publicly traded REIT of which I owned a few shares . . . but was then taken private in a leveraged buyout.

Oh, I could go on, but this is probably enough excitement for one blog post.

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