Some companies are fledgling businesses that went public in the tech stock boom and have struggled ever since; others are market veterans such as San Diego–based Anacomp, a data-services company that went dark early in 2005 after more than two decades as a publicly traded company. Community banks, such as Nicolet Bankshares, may form the biggest single industry group by number of transactions, if not by value, say lawyers who have studied the trend.

The catalyst for Nicolet’s decision to go private was an offhand comment by its accounting firm to the bank’s chief financial officer, Jacqui Engebos, that Nicolet was paying the price for being public. Daniels convened a meeting of the board’s executive committee—himself, Atwell and four of the 13 outside directors on the 15-member board. They were reluctant to decide that going private was the right response to the problem, Daniels says, agonizing over their responsibility to the community and their fiduciary duty to the shareholders. “Eventually it came down to the question of whether the regulatory costs and time burden of being a public company lined up with the bank’s mission,” Daniels says. The answer was no.

Realizing that being a publicly traded company has become too expensive is often the reason behind decisions to go private, Magill says. It can also be used as a rationale when executing a buyout for completely different reasons, such as pressure to manage financial performance on a quarter-by-quarter basis rather than with a focus on long-term returns. “It’s tough living in the fishbowl the way that public companies are required to do,” Magill says. “A short-term management focus may not be in shareholders’ best interests.”

Primrose Path
Still, going private is not for the fainthearted. The transactions are still viewed with suspicion on the part of many investors, particularly when management is leading or involved in a buyout or when a controlling shareholder (such as the founder) is proposing the transaction. “It’s tempting to do this for a variety of reasons, but it’s a delicate process that poses immense fiduciary challenges to managers and directors alike,” says Michael Ryan, a partner at Cleary Gottlieb in New York.

A buyout transaction is particularly thorny, says Ryan—more so if being proposed by a majority shareholder whom minority investors will see as having access to inside information of some kind. Almost by definition, say those who specialize in advising on these transactions, the price being offered will seem inadequate to the minority investors. Meanwhile, the process is likely to be seen as infuriatingly slow and cumbersome—not to mention risky—by the majority owner. “I have seen people get very frustrated, saying, ‘What do you mean I have to find someone on the board who isn’t my crony and put the final decision in their hands?’ ” Ryan says. “ ‘What do you mean I have to give them a budget to hire bankers and lawyers to negotiate against me? What do you mean, another bidder can come in and offer more and force me to change my bid?’ ” That last possibility, Ryan and others agree, often dissuades entrepreneur-owners from taking the buyout route: They are trying to go private to have greater control over the business they founded, not to lose it altogether in a bidding war with some third party.

In comparison, a going-dark process like Nicolet’s is relatively straightforward. It typically involves a reverse share split that reduces the number of shares outstanding, enabling the company to buy out shareholders who end up with fractional amounts of stock, or a cash tender offer to acquire stock, all to reduce the number of shareholders below the crucial 300 level. In some cases, companies that have failed in their buyout bids resort to going dark. However, that does not solve everything and does not eliminate the potential for litigation. Daniels said the bank still had to pay $125,000 in legal fees and other expenses, including $70,000 for a fairness opinion from an investment bank. “We heard horror stories about this, like a bank that priced its deal just below the fairness opinion valuation and ended up with lawsuits flying,” Daniels says. The independent directors opted to offer $18.25 a share to Nicolet investors—squarely in middle of the range proposed by the fairness opinion and a premium to the prevailing market price of $15.40 a share. Compared to the IPO price of $10 a share and the $12.50 paid by investors in the 2002 follow-on offering, Daniels says, “that seemed to most folks like a pretty good return; somewhere around 20 percent a year.”