…I think they are over regulated. You can't make a "perfect world" with regulation. This latest Sarbanes/Oxley is a good example.
The compliance cost for Sarbox doesn’t really hurt large public companies too much. It does sting smaller public companies.
I agree that you can’t make a perfect world with regulation. But I’d hope we’d agree that purpose of regulation is not to make a perfect world but to strike a balance between the economic well-being of private interest versus the public good.
If securities regulation becomes too onerous companies can revert from public to private. And I'm sure many smaller ones are contemplating just that.
But what is on the other side of the ledger? What does it cost to be private? (or conversely what is the benefit of being public).
It’s a settled principle in valuation - and in the equity and tax courts - that private firms are worth less than public ones. This is due to what is called in the appraisal community minority and marketability discounts.
Without getting down into the weeds, all other things being equal (asset value, net income, free cash flow, etc) the equity of a public company could be worth on average 25%-40% more than a private company. So, simplistically, take a public company with an equity value of $100 million, and that equity as a private company is worth only $60-75 million.
If the equity cost of securities compliance is anywhere close $25-$40 million then one starts to think hard about going private. But in reality, for a company that size, Sarbox and other compliance costs probably only adds $500 thousand (though I haven't consulted the literature and public studies post Sarbox) in cash cost. The after tax cost of that compliance is only about $325K, so say we apply a 15x P/E multiple, the cost to shareholders is only $5.0 million on their equity.
Now of course, the actual cash cost to large companies is far greater, but the marginal cost is less. We’ll know when the compliance cost has gotten too high when large firms actually start filing tender offers to go private as opposed to their PR departments whining about it. Now if one only has $10 million in equity value, it doesn’t make sense to go public, but it never has.
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