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Going Dark – A Catalyst for Attracting an Acquirer.

In Going Private on December 10, 2010 at 11:43 pm

“Going Dark” is the process that public companies can execute to bring their shareholders to fewer than 300 and to discontinue SEC reporting. At DealPen’s December 9th Executive Round Table discussing “The Role of the Public Markets for Small Companies”, we explored cost saving strategies for public companies. One of our participants was an executive that recently executed a going dark transaction, which resulted in an acquisition. The result was a deal that valued the company at nearly 4x what it was trading at prior to beginning the exercise.

This story elicited an engaging dialogue among participants and, I believe, everyone gained valuable insights about this esoteric transaction. The following are a few points of interest.

In order to go “dark”, a public company needs to get its investor base to fewer than 300 shareholders (per SEC disclosure rules). To do this, companies will execute a reverse merger and pay cash to buy out odd lots. To execute this, the company needs to make calculations and an educated bet on what multiple the reverse merger needs to be executed at to be successful and balance not spending too much cash on buying out odd lots.  A company may encounter two issues when it announces its reverse merger that will work against the <300 shareholder threshold: 1) Brokers will split share lots in accounts so they can get bought out for cash and 2) Arb players may enter the stock and, thus, add to the shareholder base prior to the reverse merger.

We learned that this company’s shareholders were concerned about ongoing communications. The company had to spend time explaining the cost-benefit analysis of going private (they estimated $300k in annual costs of being SEC reporting and another 400-500k in other annual costs that could be realized by going dark) and how that would benefit shareholders despite the lack of a national market listing (i.e. liquidity). Companies need to be prepared for robust shareholder communications on transaction rationale and articulating its plan on how it will provide ongoing communications in light of no SEC reporting.

Finally, it must be highlighted that if a company announces it is considering going dark – it needs to realize that it is telling the world that it is throwing in the towel and does not have any strategic options left to grow as a publicly-held company. Companies have a fiduciary duty  (critical Board issue) to explore any potential market transactions that would be in the best interest of shareholders and this could precipitate into an acquisition of the company (i.e., going dark, by default puts a “for-sale” sign on the company). Companies need professional, experienced advice when exploring and executing going dark and should expect to spend over $100,000 in professional fees to execute the transaction.