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A handful of telecom and Internet services companies can sit back and watch prices of their shares drop to zero and not care – they are going private anyway.
After the yearlong tech slump, the predicted recession is expected to devalue whats left of the publicly traded shares of many communications services companies, erasing the benefits of using the stock as acquisition currency or an employee incentive. After the Sept. 11 attacks, the technology-heavy Nasdaq extended the grace period during which companies can stay on the exchange with shares trading below $1. Still, many companies are expecting their delisting notices shortly.
Financial alternatives include going private or buying back all stock while continuing to trade bonds. Such decisions by vendors create long-term implications for I-managers, including less visibility into the health of companies, less verifiable information about their backers and operators, and more emphasis on personal relationships with suppliers. But some I-managers have already given up on guidance from financial markets. A stock exchange delisting, a public relations catastrophe a year ago, now warrants only a shrug from many observers.
“Given what happened with the tech industry, delistings are not that big a concern,” said Tim Roeche, chief information officer of bond rating firm Mergent. “Financial markets are not a barometer of companies health right now.”
AppliedTheory, which provides Web hosting and data services, is expecting to sit down with Nasdaq officials this month to talk about its delisting. Meanwhile, the company recently signed up Mergent as a customer.
“It is fundamentally horrible to be public right now,” said Danny Stroud, AppliedTheory president and CEO. “So many good companies are getting trashed out there. I personally talked about the delisting with all my customers, and most dont care.”
Stroud believes going private is a viable option, especially given that venture capital money is more likely to go to established companies like his than to startups. So far, AppliedTheory has not been able to drum up VC investments, and VC watchdog VentureOne has not seen a flurry of such deals this year. Still, private investors can be a force in getting companies like AppliedTheory out of public markets.
The second option, more realistic for telecom companies with large capital needs, is to eliminate their presence in the stock-trading markets but keep selling bonds to institutional investors.
A good example of such a financial structure is Velocita, one of three AT&T contractors building its next-generation fiber backbone – along with its own. Velocita has raised $225 million without selling one share so far, but it did issue stock warrants, which could lead to a public stock sale. The company also raised money from a VC fund, and received credit lines from banks and vendors.
Going private could surely trigger some lawsuits, legal experts say.
But Joe Bartlett, a partner in the Morrison & Foerster law firm, said he is a big fan of taking companies private when public markets dont appreciate them in the long run. “Why do you want to deal with a small market cap? Its a big handicap,” Bartlett said.
Winning a lawsuit against a company going private would be hard, because such companies not only have to comply with detailed Security and Exchange Commission rules, but also are not forcing shareholders to sell stock. Rather, they are offering the shareholders the opportunity to sell, Bartlett noted.