Swapping privacy for growth: one way of turning a small successful company into a big successful company is to find lots of people to invest in it. And, one way of doing that is to turn a private firm, which doesn't offer shares to the public, into a public one, which does. (Public Versus Private Companies).

There are a lot of reasons for a company to go public, but primarily, it's to raise money. Going public means selling shares in the business to anybody who wants to buy them.

Growing companies continually need funds for: expansion; paying off existing debt; corporate marketing and development; buying other businesses; and, a host of other reasons. And, once public, it's easier for a company to raise more money if it needs to--by returning to the market with a second share offering. There's also an element of prestige in having a listing on the stock exchange: it presents an image of stability that can attract key employees as well as increase business opportunities. It all adds up to more exposure for the company, which raises public awareness, increases demand for shares, and boosts share value. Many companies also use stock and stock option plans to attract and keep talented employees: as compensation there is value in the stock itself as well as tax advantages because capital gains taxes are lower than ordinary income taxes. (One way in which a capital gain is generated is when someone sells shares in a company for more than they paid for them.) That's why corporations often pay their executives with a combination of salary and stock.

And, operating as a public company helps in takeovers. A public company can raise cash to buy a rival more easily by offering more of its shares on the market. A public company also can pay for part of the purchase with a stock swap, which can be an easier and less expensive way of acquiring another company.

Before deciding to take a company public it needs to review the business carefully, making sure it has a competent board of directors and reliable information and accounting systems. It also needs legal advice on various company contracts with employees, and suppliers, for example. And, it needs to hire a good accountant to make sure its accounting procedures comply with securities regulations, assess the value of the company's assets, develop and fine-tune realistic business and financial plans, and assess any losses that will result from going public, such as special deductions and tax credits that public firms are not entitled to.

For a company to go public, its owner has to contact a stock brokerage firm to discuss the company and its goals. If the brokerage firm likes the look of the company, it then needs some hefty details on the company: management structure, strengths and weaknesses, labour force, current shareholders, competitors, as well as business accounts. If the company is considered a good prospect for success, the stockbroker pays a visit to see the operation at work. The terms of sale (of shares) are set out in a prospectus, along with the names and addresses of the auditors, stockbrokers, bankers, lawyers, and directors. The prospectus also includes a full description of the business, its history, and a detailed description of its products or services. The quotations Committee of the Stock Exchange has to approve the prospectus to make sure it provides a full and accurate picture of the operation and its prospects. The whole process takes months to complete and it's pricey with costs running from tens of thousands of dollars to hundreds of thousands.

The costs and paperwork don't stop with a listing on the stock exchange. Because public companies sell stock to the public, they are also accountable to their shareholders (and the exchange they're listed on). They must continually file financial reports, and comply with securities laws and exchange guidelines. In exchange for the investment dollars of their shareholders they give up considerable control of their company, as well as confidentiality in company operations and policies. And, that's why many private firms want to stay that way.

Private companies don't have to answer to anyone outside the firm: their operations are not subject to the same scrutiny that public companies face. Private companies usually have only a few--between one and five--directors, officers, and shareholders involved. But not all private companies are small. According to a recent article in The Economist there is a growing attraction to taking larger, public companies private, or for private sales of bits of big companies. In some cases this is done to raise money fast; in others to raise their share price by becoming more focussed on less diverse markets.

Also, the January 2003 article explains that, after three years of falling share prices, and nervous investors, "many well-run, profitable firms trade cheaply, often below the book value of their assets." So, that works against one of the main reasons for going public in the first place--to raise cash. It also puts a dent in making acquisitions by using the firms (under-priced) shares.

Jim Goodnight knows all about the advantages of being a private firm. Mr. Goodnight is President and Chief Executive Officer of SAS Institute in North Carolina. The computer software company, which started business in 1976, now has more than 3.5 million users worldwide, customers in 118 different countries, and 139 offices around the world with more than 9,000 employees. It is the world's largest privately held software company, and Mr. Goodnight doesn't have any plans to change that. As founder of the billion-dollar company, he says he answers to no one--no shareholders, no board of directors, no stock market analysts, all of whom push companies to continually deliver rising quarterly earnings. The company was featured in 2002 on the CBS news magazine show, 60 Minutes, for its extraordinary employee benefits: a 50,000 square foot state-of-the-art fitness centre, a flexible 35-hour work week, onsite day care, a company medical staff including a doctor, nurse, physiotherapists, and social workers, as well as a company school, for example. SAS aims to keep its employees happy and it's repaid handsomely for its generosity: the company's turnover of staff is about 3% in an industry where the standard annual turnover rate is more than 20%. That translates into a savings of somewhere between $60 million and $80 million in the cost of recruitment and training. Mr. Goodnight says his biggest asset is his employees, and he says happy employees keep customers happy which makes him happy.

"There is no trust anymore in public companies," Mr. Goodnight says. "I think it's an excellent time to be private."

SUGGESTED ACTIVITIES:

1. Timothy Eaton's talent for business put him ahead of his times in retail development (as founder of the now-defunct Eatons department stores). However, future generations of the Eaton family missed out on the changing market trends. One of the things the Eaton family had a reputation for was secrecy, in their personal lives as well as the company's business affairs. Read Rod McQueen's 1999 book, The Eatons (ISBN: 0773760784), and discuss whether or not you think the company might have survived if it had been a public firm.

2. Do a survey of employee benefits at local public and private companies and choose the companies that you think would be the best to work for.

FACT FILE

Companies typically raise millions of dollars when they become public.

A study by The Globe and Mail in October 2002 showed that family-run companies are among the worst performers when it comes to corporate governance.

When the Toronto Stock Exchange assesses a company's suitability for listing, all officers, directors, and holders of more than 10% of the company's stock must produce details of their backgrounds, business experience, and industry knowledge.

Websites

University of Western Ontario,

Business Library (Best

Companies to Work for in

Canada)--http://www.lib.uwo.ca/business/50bestwork.html

PROFIT Magazine, Canada's

Fastest Growing Companies--http://www.profitguide.com/profit100/

RELATED ARTICLE: All in the family.

A lot of private, as well as public, companies are family operations, and that can be a very good thing. According to a new U.S. study, successive generations don't always drive Grandpa's firm into the ground. The eight-year study was carried out by two American professors, Ronald Anderson at American University in Washington and David Reeb at the University of Alabama. They discovered that family companies can, in fact, perform better than non-family businesses, and bringing outsiders into the executive suite is not necessarily a good move.

The study found that, while profit eventually starts to decline over the generations, family companies still outperform non-family companies. Also, they are better at accounting, perhaps because "family members view themselves as the stewards of the firm." This is particularly true when the founding members are still at the helm: market performance can start to lag when the descendants move in, but investors seem to think descendants are at least as competent as non-family CEOs.

A recent Globe and Mail article talked to Ian Greenberg, president and chief executive officer of his family's Montreal-based public firm, Astral Media Inc., about the report. Mr. Greenberg wasn't surprised at the professors' findings because he says senior executives in family companies can afford to take a long-term perspective without fear of losing their jobs for having one or two bad quarters. And, they're more familiar with the business and its culture.

But the authors of the study recognize there are plenty of cases of family owners who go overboard rewarding themselves and hurting the interests of investors. That takes us to an interesting finding: the gains associated with family ownership tend to peak at the point where the families hold one-third equity ownership. So, the more control the family has beyond that, the more potential there is for poor performance. And keeping tabs on that is the job of a diligent board.

The study, Founding Family Ownership and Firm Performance: Evidence from the S&P (Standard & Poor's) 500, is to be published in June 2003 in the U.S. Journal of Finance.

RELATED ARTICLE: A dynasty crumbles.

The Timothy Eaton Company was one of Canada's best-known and most successful private family companies for more than a century. As a 20 year old, Timothy Eaton came to Canada from Ireland in 1854 and opened a small store with his brother in St. Mary's, near Stratford, Ontario. But, Timothy was drawn to the big city and bought a store of his own in downtown Toronto in 1869, when the city had a population of 70,000. The father of what would become a retail dynasty in Canada, he did everything right: he was the first to set fixed prices for all his goods, eliminating the practice of haggling. He guaranteed a no-hassle return policy (another first). And, he pioneered the idea of mail-order catalogue shopping in 1884, a real boon for country folk and a great marketing tactic. By the time Timothy Eaton died in 1907, the company had opened a second store in Winnipeg, owned two factories, had offices in Europe, and employed 9,000 people. With his son John Craig Eaton in control, the company continued to grow: by 1919 Eaton's employed 22,000 people. Then, John's cousin Robert Young Eaton took over, and within a decade the company had captured 58% of department store sales in Canada. It reached its peak during World War II (1939-45) with 30,000 employees, and the empire seemed unshakable.

By the 1960s, when Timothy Eaton's grandson John David ran the company, it had 56 stores and 45,000 employees, but it was starting to lose ground to its main competitor, Simpson's-Sears. Specialty stores such as Canadian Tire took a chunk out of Eatons too. A generation later, in the early 1990s, word was out that the company was in trouble financially, but as a private company information was scarce. Then, the American big-box stores lured more customers away and the dynasty was crumbling fast. By 1997, Eaton's share of department store sales had dropped to 11.4%, behind The Bay, Sears, Zellers, and Wal-Mart. Two years later, the firm was bankrupt. While Timothy Eaton set the trends of his time, his descendants couldn't keep up with them.