Some retailers are turning to a new strategy to satisfy public shareholders who are anxious about how those firms will survive the hypercompetitive marketplace: buy out those shareholders.
Recently, auction house Sotheby’s announced it is being purchased by telecommunications entrepreneur Patrick Drahi for $3.7 billion. A few days earlier, an investor group led by Richard Baker, the chairman of Hudson’s Bay, (which runs Saks Fifth Avenue and Lord & Taylor), offered to take that company’s remaining publicly traded shares private. Both of those are on the heels of private-equity firm Elliott Management agreeing to acquire all of publicly traded Barnes & Noble, the last major bricks-and-mortar bookseller, for $683 million.
This movement of retailers turning private, or at least considering the option, is just one manifestation of a great shakeout that is occurring in the sector. America is “overstored and overbranded,” says Denise Kramp, a Korn Ferry senior client partner and the firm’s North American retail sector leader. Companies are shuttering stores and selling off unprofitable businesses to improve sagging bottom lines. And the pressures on these companies will only continue as an increasing share of retail sales moves online over the next decade.
For executives at traditional retail companies, there are both pros and cons to going private. “In general, most executives take a wait-and-see attitude, but it is a time of high uncertainty and you often see a turnover of executives in the first year or two after a company goes private,” says Craig Rowley, a Korn Ferry senior client partner who specializes in retail.
To be sure, many corporate leaders find the move from public to private marketplace liberating. “When you get bought out, you have owners who have clear direction about turning around the business,” says Rowley. “If you are part of that executive team and you pull it off, you can make a lot of money.”
Executives at the now-private firms no longer have to worry about raising funds from the stock market, dealing with some of the numerous compliance issues associated with being public, or producing all the quarterly filings. An earnings shortfall won’t send the firm’s value plummeting, as it can when the company’s public investors sell shares en masse. Plus, it’s one less area of criticism at a time when retailers are facing plenty of it already.
But experts say there are downsides to going private that can prove troubling to executives. Many firms, once taken private, often undergo major layoffs or other forms of cost cutting that don’t prove effective. Indeed, Kramp says it’s difficult to find concrete examples of retail companies that have reinvented themselves for the better after a period of going private. “There is a nervousness in the private-equity world about buying retail companies,” says Kramp. “The road to success is long.”