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Going Private

A sagging stock market and stiff new regulations are prompting public companies to become private—a transition rife with employee relations.

HR Magazine, December 2004

Quintiles Transnational Corp. Chairman Dennis Gillings was frustrated. He felt his company was underappreciated by Wall Street and that its stock was undervalued and flying under the radar of investors. Being public was an end that no longer justified the means. So Gillings and a group of investors took what could only be considered a bold step, even in today’s world of low stock prices and tight regulation: They took the public company private.

Gillings, who founded the Durham, N.C.-based contract research company in 1982, teamed up with One Equity Partners LLC, the private equity arm of Bank One Corp. Together they formed Pharma Services Holdings Inc., which offered $14.50 per share to buy Quintiles in April 2003. Five months later, the company was delisted from Nasdaq and placed in Pharma Services’ hands.

While the moneymen were intimately involved in the transaction, the ripples of the deal were felt throughout the company. Because employees were quite interested and justifiably concerned throughout the transition, it was up to Quintiles’ HR team to lead the employee relations campaign.

“The HR department was involved heavily in decision-making as we began to think about it and decide how to execute it,” recalls John Russell, executive vice president, general counsel and chief administrative officer. As a service company with about 16,000 employees worldwide, “our employees are essential to everything. We wanted to get the message out to employees as much and as often as we could.”

As Quintiles’ example demonstrates, employees are at the heart of any move to take public companies private—a switch more corporations are considering in the wake of the stock market lull and the higher cost of complying with the Sarbanes-Oxley Act of 2002. When conducting such transformational transactions, companies must weigh the employee relations pros and cons as heavily as the financial ones.

And those employee relations concerns can cover a lot of ground, ranging from employee communications to compensation to recruitment and retention. With HR’s help, companies can successfully address these issues and ease employees’ concerns.

Why Make the Switch?

Why a company chooses to go private may depend on many factors—among them cost and strategic freedom.

Mike Meissner, who specializes in tax law and executive compensation with the Cleveland law firm Squire, Sanders & Dempsey LLP, says that as the stock market rose in the late 1990s, many companies jumped into the fray too quickly, vying for the “chance of making a real killing” by going public. Faced with a slipping market and the strictures of Sarbanes-Oxley, some corporate leaders began to believe they weren’t getting the bang for the buck they expected, says Meissner.

Certainly, the burdens imposed by Sarbanes-Oxley have prompted some companies to at least think about going private. A survey by the law firm Foley & Lardner LLP this year found that of 115 public companies, 21 percent were considering going private due to corporate governance and disclosure reforms—up from 13 percent last year.

The survey also found that for the 85 responding companies with annual revenue of less than $1 billion, the cost of being public more than doubled between 2001 and 2003, jumping from $1.24 million to $2.86 million. For companies with annual revenues of $1 billion or more, costs rose to $7.4 million.

The rising costs weren’t an issue for smaller companies just in 2002, when the Sarbanes-Oxley Act took effect, but stretched on into 2003. Between fiscal years 2002 and 2003, costs rose 35 percent. Directors’ and officers’ insurance represented the largest portion of the costs, reaching an estimated $850,000 for fiscal year 2003. In addition, 60 percent of respondents said they were unable to better predict costs associated with corporate governance reforms, even though they were in their second year of Sarbanes-Oxley regulations.

Those surging costs were a key factor in spurring Boyd Brothers Transportation in Clayton, Ala., into going private. In a deal completed in September, Boyd Brothers merged with BBT Acquisition Corp., which is owned by Boyd family members, including the company founder.

Before the merger, the Boyd family owned 70 percent of the stock in the company, which has about 1,250 employees and operates in 48 states. The family decided to take over the company because of “the costs that were associated with Sarbanes-Oxley,” says Richard Bailey, Boyd Brothers’ chief financial officer and chief operating officer. The “risk and amount of work concerned the Boyd family,” he says.

Another reason companies go private is to enact a long-term strategic vision without worrying about the quarterly profit demands of Wall Street, says Susan Bock, SPHR, human resources consultant with RSM McGladrey Inc., a business consulting and tax firm in Irvine, Calif.

Case in point: The privatization of Dole Food Co. Inc. in Westlake Village, Calif., in 2003 was driven by Chairman David H. Murdock’s desire to adopt a longer-term view for the company—rather than focus on quarterly profits—says Sue Hagen, senior vice president of HR at Dole. The $4 billion company is the world’s largest producer of fruits and vegetables with nearly 60,000 employees worldwide. Murdock announced in September 2002 his intention to buy back the remaining 76 percent of common stock he did not already own, and the deal was closed the following March. The cost savings of going private held little sway in Murdock’s decision because the company still has bondholders, meaning Dole maintains the same reporting and disclosure requirements as a public company.

Similarly, Lillian Vernon, a Rye, N.Y.-based catalog and online retailer, went private in 2003 to free itself to pursue longer-term strategies. “Wall Street is fixated on the next quarter’s results,” which makes it “difficult to have a long-term perspective on running a company,” says David Hochberg, the company’s vice president of public affairs.


Whatever your company’s reasons for going private, communicating to your employees about the switch can be tricky. You want to be as honest as you can to prevent the rumor mill from churning, but the period during which a company makes the transition comes with certain limitations on communication.

“For the time when the bid process is going on, you’re going to be under restrictions by the SEC as to what you can say to employees because it becomes material to the investment world,” says Russell of Quintiles. “The challenge to HR is to get the message you want out, while dealing with far too many lawyers for your taste.”

Once a company decides to go private, you can tell employees about the decision without making your lawyers nervous by going into too much detail too early. “It might just be, ‘This is the decision we made and why. As we work on it, we’ll provide more information,’ ” Bock says.

Bock also points out a psychological reason for holding off overloading employees with information at the start. “It’s almost like they’re going through shock, almost like they can’t hear anything beyond the initial announcement.”

After the shock wears off and you’re cleared to give out more information, convey the changes in terms rank-and-file employees can understand, keeping in mind that they often come from diverse educational and cultural backgrounds, Bock says.

How you com-municate to employees is important as well. Give employees many opportunities to voice their concerns. The changes at Lillian Vernon were relayed to employees through e-mails, the company’s newsletter and a town-hall-style meeting with the company’s new chairman, Strauss Zelnick, who spoke to employees and fielded their questions.

“It’s always important to constantly be sensitive to employee concerns, even concerns that may be far-fetched,” Hochberg says. In Lillian Vernon’s case, employees expressed fears that the company headquarters might be moving to Manhattan or to Virginia Beach, Va., where the company’s distribution center and call center are located.

At Dole, the HR de- partment fielded questions on the differences between public and private companies, how the change would affect an employee personally and whether the move would change the company’s strategic direction, Hagen recalls. Most of Dole’s employees had never worked at a private company. “It was a little bit of a mystery if there was any difference or not.”

For questions on stock options, purchase plans and other financial matters, Quintiles’ Russell recommends having an attorney help prepare a question-and-answer forum. “Don’t let business leaders go extemporaneous on you,” and risk them giving out misleading or wrong information.

For employees who have company stock in their 401(k) plans, or who have purchased it privately, companies should emphasize the way employees will profit, suggests Jack Lord, a partner in the Orlando, Fla., office of Foley & Lardner, which specializes in labor and employment law. For example, if the stock is being traded at $10 a share, and auditors value it at $15 a share, an employee’s retirement fund will rise in value because of the buyout.

Whatever aspect of the transaction you deal with, planning ahead can help you manage internal communications more effectively. But in this high-tech age, Quintiles learned that communication doesn’t come just from the inside. While the company was going through its transition, web sites frequently posted information and rumors that the company couldn’t address, Russell says. “During the [intermittent] silent periods, you can’t communicate. That doesn’t keep the [Internet] bloggers from doing that. Now every employee with access to the Internet can pick up any rumor they want.”

Responding to the rumors can be “tricky,” he says, but corporate leaders need to keep focused on the key message points—that employees should get the job done, focus on the task at hand and believe in management.

Bock says that having trust in management is one of the keys in the transaction. “Naysayers out there will always want to bring that up—‘What are you hiding?’ ’’ she says. “HR needs to expect these questions and have answers to them.”


A major concern for HR in this process is how to motivate, reward and retain executives and rank-and-file employees without the use of stock grants and stock options. Companies must have a desirable option to present to employees when announcing the loss of those financial rewards.

When Boyd Brothers Transportation went private, the move affected both senior executives, who held stock options, as well as lower-level employees, who had Boyd Brothers stock in their 401(k) plans. Now the company is looking at setting up bonus incentives based on performance for top managers and possibly implementing a profit-sharing plan for those leaders.

With the 401(k) plan, employees had 15 different plan options; the company intends to double the choices, COO Bailey says.

Before Lillian Vernon’s privatization, top executives had stock options and many employees held stock in their 401(k) or privately. Now the company offers an incentive plan to leading executives based on individual and company performance, but Hochberg declined to release details because, well, Lillian Vernon is now private and is not required to.

In addition to motivating employees as a private company, HR must consider that compensation costs may rise because the firm no longer has the lower-cost option of compensating employees with publicly traded stock.

Retention and Recruitment

Hochberg advises companies that are going private to “always make sure you put your arms around top performers. You can’t afford to lose them; you can’t afford to de-motivate them,” so it’s essential to assure them that they are needed and wanted in the company’s new structure, and that they will be rewarded in different ways.

Still, it doesn’t always work. Lillian Vernon lost a “handful” of key players in the transition from a public to private company, Hochberg says. “Change of that magnitude brings anxiety to people,” prompting some to leave on their own. In other cases, headhunters came to scout the ranks.

With the acquisition by Murdock, two senior executives left Dole. One was an international executive who wanted to start his own business; the other chose to retire. Leaving Dole at that time “was good closure for where both of them were careerwise,” Hagen says.

For Boyd Brothers, the opposite occurred. Rather than losing employees because of the move, “a lot of them are relieved,” Bailey says. “Employees are always concerned when you’re public that someone will come buy you out.”

Recruitment also may become an issue if potential candidates think going private dulls some of the company’s luster. That could make it more difficult to recruit new employees, who are attracted by the notion of working for a company listed on the New York Stock Exchange, Lord says.

Hagen says she doesn’t believe the company’s switch to a private company has hurt recruitment. Dole remains a Fortune 500 company and “offers a total compensation package of cash, incentives and benefits that are competitive in the marketplace.”

Easing the Burden

While the decision to go private may be financial or strategic, employees are the ones that bear the burden through uncertainty. It’s HR’s responsibility to make sure their questions are answered and their needs are met. Executives need to remember that the pro-cess of going private is felt at all levels of the organization.

For companies that decide to go private, it’s no quick, easy task. In fact, the transaction typically takes about a year, Russell says. “You get deal fatigue. The workforce can’t get deal fatigue. They need to stay focused on the job they’re doing.” To get through it, he recommends, “keep your cool, keep your sense of humor, because it’s a long road.”

During its transition from a public to a private entity, Dole found that certain areas, such as the tax, treasury and legal departments, saw their workloads increase significantly. Employees worked extra hours, and outside experts were brought in to meet deadlines, Hagen says.

To ease the pain, Hochberg suggests that all major structural changes in the privatization process be done quickly so “you pull the Band-Aid off all at once.” Then management can tell employees that the key changes have been completed, and that it’s time to move forward as a team.

Susan Ladika has been a journalist for more than 20 years, working in both the United States and Europe. Now based in Tampa, Fla., her freelance work has appeared in such publications as The Wall Street Journal-Europe and The Economist.


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