Good Companies Going Private

Aftermarket performance auto-parts maker Edelbrock (Nasdaq: EDEL  ) announced strong revenue growth in its third-quarter earnings report this morning. Sales rose significantly across the board. Exhaust systems and chrome accessories were hot items -- up 38% and 37%, respectively, from a year earlier. Bolt-on horsepower parts such as intakes and heads were also up strongly.

The improving economy, movies like The Fast and the Furious and Gone in Sixty Seconds, and the popularity of car shows on cable television are all helping to boost the aftermarket parts industry. (The Discovery Channel's American Hotrod, The Learning Channel's Overhaulin' and Rides, and MTV's Pimp My Ride are very hot right now.)

Edelbrock is a great company, respected by car enthusiasts worldwide. I have an Edelbrock Performer intake and carburetor on my 1966 candy-apple-red fastback Ford (NYSE: F  ) Mustang. Well, OK, it's my wife's 'Stang. But I make plenty of excuses to tinker with it, in which case it always needs to be test-driven. So why, then, would the 66-year-old family-run company want to consider going private, as it announced last month, when it went public just 10 years ago?

There's been a 30% upsurge in companies going private since Sarbanes-Oxley came into existence in 2002 to protect shareholders from corporate accounting scandals. As is the norm, increased legislation comes at a cost. The bill significantly increased the reporting requirements and accountability to shareholders of public companies. And that has added prohibitive costs that particularly impact smaller companies. Edelbrock, for example -- as successful and well known as it is even with nearly 700 employees -- has a Hidden Gems-like market cap of just $81 million.

But there are other reasons why a company might consider going private as well. The rapid shift from bull to bear market showed us that greed for growth can devastate companies when they lose sight of the long term. FAO Schwarz is one of the best examples, having endeavored overzealously to compete with Toys "R" Us (NYSE: TOY  ) and Wal-Mart (NYSE: WMT  ) instead of continuing to differentiate itself. It wound up going through two bankruptcies and was put on life support, begging for a buyer.

Yet another reason could be that a company's leaders see strong growth ahead but don't think that markets will fully recognize this. In that case, the company may be able to privatize at a value. Then there can also be nonpositive reasons. If a company is concerned about its past accounting, it might want to remove itself from being accountable to public shareholders. And several years of lousy stock performance for many companies hasn't offered much incentive to stay public either.

Tom Gardner selected another auto-parts company, Borg Warner, forMotley Fool Stock Advisorsubscribers. Check out the newsletter for six months, risk-free.

Fool contributor Mark Mahorney doesn't own shares of any companies mentioned.


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