Time Capsule: Private vs. Public Vendors: I’ll Take the Former

I wrote weekly editorials for a boutique industry newsletter for several years, anxious for both audience and income. I learned a lot about coming up with ideas for the weekly grind, trying to be simultaneously opinionated and entertaining in a few hundred words, and not sleeping much because I was working all the time. They’re fun to read as a look back at what was important then (and often still important now).

I wrote this piece in July 2007.

Private vs. Public Vendors: I’ll Take the Former
By Mr. HIStalk

It used to be that every company’s goal was going public. Now, it seems like they all want to go private.

Private equity was all the rage back in the 1980s, when companies like KKR ruled the roost with their leveraged buyouts and hostile takeovers of stagnant companies, often using Michael Milliken’s junk bonds to finance the raid.

Their goal was simple: strip the target company’s assets clean and sell the parts for more than the cost of the whole. Long-term strategy was for suckers. Real money came from flipping.

Private equity is back. You’ve seen the headlines about buyout kings The Blackstone Group, whose proposed initial public offering has even attracted the investment interest of the Chinese government.

Several healthcare IT vendors have taken the private equity route (Kodak’s health group, Surgical Information Systems, Dairyland, and quite a few more come to mind.) Do customers fare better under private investors as opposed to being publicly traded? My tentative answer is yes.

Going public provides obvious benefits: a mammoth influx of capital, easy distribution of liquid equity to early investors and executives, and access to customers and investors who prefer doing business with companies that meet rigorous financial market requirements (see: Enron).

Stock money isn’t free, though. Outsiders get a big piece of the action in return. Administrative costs skyrocket. Business must be conducted transparently, sometimes reducing competitiveness. Worst of all, fear of irrational investor decisions brings the strategy horizon down to about two quarters.

Private equity managers can bring in their own capital from a long line of salivating institutional investors. Their holdings can operate as secretively as they like, free of SEC oversight and even Sarbanes-Oxley (at least until some Enron-type bloodletting sends investors screaming to their Congresspeople). They can overcompensate executives, rake off huge amounts of money as management fees, and secretly plot the day when they IPO the formerly low-flying company for a quick buck (which some would say was their primary motivation in the first place.)

It’s still greed, which as Gordon Gekko and I always say, is good.

From a customer’s perspective, I’d rather see my vendor go private than public. Only a few vendors went public during my customerhood. All of them went from pretty good to pretty awful once they’d sold their souls. Maybe they would have tanked anyway, but innovation and responsiveness took a back seat to snaring new business and bringing in dispassionate Wall Streeters to manage their particular HIT widget. As a customer, I was suddenly less important than big- money investors because they’d already taken my money.

Private investment at least gives the illusion that the company resisted the urge to cash in. Their companies don’t manage quarter by quarter. Sometimes the equity firm has a good track record of being a benign steward, happy with slow, steady growth instead of yearning for a quick flip. They bring in far better talent than would have ever worked for the previous owners.

Your mileage may vary, but as a customer, I’ve never seen a company improve by going public. And while I’m sure vendors sometimes get worse by turning over the keys to private money, I’d take my chances.