Is Going Private the New Investment Trend?

Includes: LEH, MDSY
by: Aaron Katsman

With shares in financials and hi-tech being crushed, I think we are about to see a new trend develop. You’re probably thinking that I will suggest something along the lines of re-branding. No. What I am talking about is a change that is less cosmetic and more fundamental. I am talking about taking publicly traded companies private. Monday’s NY Post has an interesting report how on struggling investment bank Lehman Brothers (LEH) is trying to figure out a way to go private.

According to sources, talks internally centering on privatizing Lehman have gotten very serious consideration after a blistering onslaught of rumors and questions about the firm’s solvency have caused the venerable bond shop to shed more than 79 percent this year.

Lehman isn’t alone. Israeli hi-tech firm BluePhoenix (BPHX), whose shares have also been nailed, has mentioned that it is also thinking about going private.

For companies this is a great situation. They can go private, reset the cap-tables, retain employees- who are currently holding options that even a deep sea diver would have trouble recovering- by issuing new options. Then they can focus on stabilizing their business, getting back to profitability, and then in a few years after this current crisis is a memory, go public in a ‘much anticipated’ IPO. Ultimately, the companies will be back trading at pre-bear market levels. Senior management, who share much if not all the blame for the current debacle, will come out smelling like roses, as their stock will be worth hundreds of millions of dollars.

This sounds good, but who loses? You guessed it. The same people who always are left holding the bag - the INVESTORS. You see, they are the ones who bought into Lehman at $75 a share 12 months ago, and will be lucky to get $15 on a deal of some sort. They heard analysts beat the drum on BluePhoenix at $22 about 9 months ago, and decided to invest, only to cringe every time they hit refresh on Yahoo finance to see if the stock has held the $4 level.

Going private may be a great solution for a company to weather the current market malaise and return to health. Unfortunately, for investors, it will be another in a long line of recognized tax losses.

Disclosure: The author’s fund has a position in  BPHX. He has no position in any other stock mentioned as of July 15, 2008.