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Playboy: Small Business Lessons on Going Public

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By Tanya Roth, Esq. on July 16, 2010 10:03 AM

There is a battle going on at Playboy, and no, it does not involve bunnies wielding swords. This battle is for control of the company, leaving founder and guiding force Hugh Hefner trying to take the company private to avoid losing control in a sale. That is a real possibility, as FriendFinder Networks, parent company of Playboy competitor Penthouse, has made an offer for the company. FriendFinder has offered a total of $210 million, or $7.43 per share, besting Hef's offer of $185 million or $5.50 a share.

According to Forbes, Playboy's bunny ears have had the droops and the company has consistently lost value since 2006. Playboy's problems are due in no small part to the availability of free online porn. However, Hef's offer perked up company value a bit, allowing it to hit pre-financial crisis 2008 levels. But if Playboy were sold to FriendFinder or any other buyer, friendly or not, Hef could lose his still important editorial control of the magazine. Not to mention the Mansion.

This struggle for control over an iconic company should give small business owners just one more reason to consider carefully before going public. Many times, a business looking for capital to grow can benefit from such a move. According to the SEC, there are several benefits to taking a company public. Not only would access to capital increase, but the company may be able to attract and retain more highly qualified personnel if it can offer stock options, bonuses, or other incentives with a known market value. The image of a company could also be improved as well.

However, some of the downsides to going public include the fact that the obligations of a public company to its shareholders are rigorous and company officers may be liable if the obligations are not met. Company founders can also lose flexibility in managing the company's affairs, particularly when shareholders or a board of directors must approve their actions. A public company is required by the SEC to reveal sensitive information on an ongoing basis, such as business strategies, financial results, and executive salaries. Finally, control of the company, as well as management positions, can be taken away from existing management if a dissident investor or group of investors obtains majority control.

Then there are the shareholder suits, one of which is now also dogging Hugh Hefner. The Wall Street Journal reports that the day after Hef announced plans to buy back the company, a shareholder sued in Delaware Chancery Court, alleging the plan diminishes shareholder value. Hef will now have to battle not only Penthouse, but his own shareholders, if he wants to buy back the company he launched with the first issue of the magazine, in 1953.

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