Why nano-capitalization public companies should evaluate strategic alternatives, including going private transactions

By Russell Tolander
Managing Director

Nano-capitalization public companies, those with a valuation of less than $50 million, have fewer active buyers interested in them in today’s public markets, due to existing trends such as investors’ favoritism toward large companies, technology startups and disruptive or innovative business models (think Uber, Lyft, Amazon).

That can leave small but quality public companies with valuations that sit below what they’d be worth in the private market. Maybe some of these companies should be private after all.

That might sound like a surprising statement coming from a nano-capitalization veteran who has significant experience helping small to mid-sized companies execute initial public offerings.

However, it’s clear that the favoritism that’s emerged in recent years toward unicorns, large companies, tech startups and disruptors has left some very decent companies in the dust. Now, with the recent volatility of the equity markets, some of these smaller businesses face daunting headwinds, including the prospect of being delisted.

Fewer buyers

The push toward growth investing over value plays puts new economy companies in the driver’s seat and can leave these small but good companies as public orphans with fewer potential buyers.

If a business hasn’t reached its objectives or added shareholder value as a publicly traded company, then it might be time to look at alternatives, especially if the market is different now than it was when your company went public – and even if that public event was just a handful of years ago.

If a $20 million capitalization company spends about $800,000 (4% of its value) in incremental expenses annually to remain a public company, is that a good value for shareholders? In some cases, the answer might be yes. It might make sense for a biotech company, for example, that is researching a new drug and needs ready access to capital. It might not make as much sense for an old economy company.

Strategic alternatives

Going private, for some companies, could be the appropriate strategic move.

There are several reasons why a company might consider going private:

  1. The company is substantially undervalued in the public equity markets.
  2. The stock price is stagnant without clear catalysts for future upside.
  3. The cost and regulatory requirements of being a public company have become burdensome.
  4. Financial information (i.e., profitability, liquidity, and margin structure data) and other competitive information is known by other industry participants.
  5. The company doesn’t need to raise capital.

Alternatives to going private include implementing an M&A strategy to increase the scale and size of the existing enterprise and renew growth prospects that could lead to value restoration. Doing nothing or “staying the course” remains an option but runs the risk of attracting activist investors if undervaluation persists.

If being public hasn’t been all that you thought it was cracked up to be, then it might be time to get with an M&A advisor well-versed in the public and private markets for small to mid-sized companies, to explore your options more in-depth.

Are you being strategic in your thought process and decisions around public vs. private?

Capital Alliance Corporation is a Dallas-based investment banking firm with a four-decade history and deep operational and M&A experience across many sectors. Capital Alliance is affiliated with Oaklins International, the world’s most experienced mid-market M&A advisor, with 800 professionals globally and dedicated industry teams in 40 countries worldwide. We have closed over 1,500 transactions in the past five years.