James Surowiecki discusses Private Lies:
In the late nineteen-nineties, every bright young entrepreneur with a startup was dying to take his company public. In a time of generous stock options and irrationally optimistic markets, I.P.O.s seemed to offer a reliable road to riches. But lately the opposite approach — taking a company private — has become popular. Since the beginning of 2005, nearly a hundred top-level executives at public companies have participated in management buyouts, or M.B.O.s, joining private-equity investors to buy their companies from shareholders.
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What the executives in these deals don’t say is that such buyouts create huge conflicts of interest. The C.E.O. of a public company is legally obligated to look after shareholders’ interests, which in the case of selling the company means getting the highest price possible. But when that same C.E.O. is trying to buy the company, he wants to pay the lowest price possible. [...] A study of buyouts over the past two years suggests that when management is the buyer it pays, on average, thirty per cent less than an outside bidder.Even more troubling, management buyouts give executives at public companies an incentive not to maximize the value of their companies before the sale. In 1987, for instance, after the textile giant Burlington Industries was taken private by a buyout group that included top Burlington executives, it quickly sold off the company’s “nonproductive assets,” including ten separate divisions and a host of manufacturing plants, for well over half a billion dollars. The executives could have done those deals while Burlington was a public company. But doing them after the buyout, when they owned more of the firm, meant that they reaped more of the benefits. Similarly, management buyouts are often associated with major restructurings to make companies leaner and more profitable. With few exceptions, these restructurings could be done before buyouts. But they’re not, in part because executives would rather wait until they own a bigger chunk of the company. A study of buyouts in the U.K., for instance, found that C.E.O.s who planned to buy their own companies were less likely to embark on restructuring than C.E.O.s who weren’t.
Also, executives, before making a buyout offer, use accounting gimmicks to make their company’s performance look worse than it really is. In a study of more than sixty companies that went private, Sharon Katz, of the Harvard Business School, found that, in the two years preceding a management buyout, companies recorded lower than expected accounts receivable, which drove profits down. Similarly, a study by two accounting professors found that executives pursuing M.B.O.s tended to accelerate the recognition of expenses and delay the recognition of revenue, making their companies look less profitable than they were. Management buyouts have a reputation for dramatically improving companies’ performance. But these studies suggest that part of the reason is that executives were making them look bad while they were public.
It gets worse:
But if management buyouts were really about the virtues of private ownership you’d expect companies that go private to stay private. The reality, though, is that, with high-profile deals, this rarely happens. Instead, after a company has been buffed and shined, it’s generally taken public again.