How going private hides public sins

The Baltimore Sun

Your company is late filing financial disclosures, under investigation for stock-option irregularities, about to be ejected from Nasdaq and getting its pants sued off by shareholders.

Want to get away?

Now you can, thanks to the willingness of "private equity" funds to gather even dysfunctional public corporations into their unfathomable bosoms.

SafeNet Inc., a Belcamp Web-security outfit that faces accounting, options and lawsuit problems, is going private. PHH Corp., which owns a Hunt Valley fleet-management operation and hasn't filed financial statements for 2006, looks like it'll be sold to General Electric and Blackstone Group.

Educate Inc., a Baltimore tutoring company that disclosed accounting problems last week, also is also going private. Laureate Education Inc., the Baltimore concern that on Monday revealed it had bookkeeping weaknesses and had fired its outside auditors, has decided to ... well, you get the idea.

It's the perfect way to sweep away reality.

Once a firm is owned by a lightly regulated private equity pool, there are no more pesky Securities and Exchange Commission documents to file. No more solemn duty to widows, orphans and other public shareholders. And best of all, no more mortifying disclosures about federal investigations, lawsuits, executive pay and accounting mishaps.

In SEC filings, SafeNet demurely refers to these items as "the risks of remaining independent."

The company has admitted incorrectly dating stock-option grants, faces investor lawsuits and a federal investigation, and last fall saw its top two executives resign over the scandal. Its listing on the Nasdaq electronic exchange is also at risk.

The disappearing acts have angered shareholders.

In a lawsuit filed last week, Globis Capital Partners accused SafeNet's board of selling out to Vector Capital for a sweetheart price in exchange for "likely" indemnifying the directors against options-backdating liability, according to Bloomberg News.

"Why would the director-defendants cause the company to agree to a low-ball offer with virtually no premium?" the complaint said.

SafeNet denies that a Vector buyout would diminish SafeNet directors' liability.

"They're already indemnified to the extent of Delaware law" by SafeNet, company spokeswoman Donna St. Germain said yesterday. (The company is registered in Delaware.) "So they can't be indemnified any more," even by a third party such as Vector, she said.

The problems at Educate and Laureate - former siblings that share office staff - don't seem to be as severe as SafeNet's. Laureate's have to do with internal reporting related to income taxes in 2005 and 2006. Educate incorrectly recorded $3.5 million in sales last spring that should have been booked in the summer, which boosted its profit for the spring quarter.

Neither Educate nor Laureate has indicated it is under federal investigation for the irregularities, nor have they disclosed options-dating problems. Even so, the private equity veil should provide a welcome cover for those companies' booboos.

T. Rowe Price, Select Equity Group and BlackRock Inc. have all publicly opposed Laureate's agreement to sell out to management for $60.50 per share. Among other things, the deal would trigger $105 million in payments to Laureate chief Douglas Becker.

In a letter to Laureate's board, Select Equity called the price "grossly inadequate" and said the agreement is "flawed by clear conflicts of interest."

PHH also will welcome shelter from the elements. It was never really ready for the prime time of the New York Stock Exchange, where it has been trading since Cendant Corp. spun it off two years ago. It has been slowly fixing incorrect accounts involving deferred taxes, intangible assets and a joint venture, and it has been sued by shareholders.

Luckily for PHH, GE Capital has agreed to buy its Hunt Valley fleet-management operation, and Blackstone will take over its mortgage operations. Thus the private-equity boom helps usher another outfit into the shadows. (GE is public, but Blackstone is private.)

Unfortunately for dysfunctional public companies, this safety valve won't always be around. Someday the world's central bankers will sop up the liquidity fueling private equity, and companies trading on the exchanges will have to endure painful, public rehabilitation when they don't play by the rules.

It won't be altogether pleasant for executives and directors. But it'll be a good thing for shareholders and society.

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