A Few Insiders Saw Value Before the Rally
Painchaud said these management-led buyouts correlate nicely with his data, which show more positive insider activity over the last two weeks. He noted that insider buying has increased and insider selling has abated in a broad range of sectors recently, but that the technology group has seen some of the best action.
Still, not everyone is convinced that corporate executives have suddenly turned more bullish. Schwenger noted that insider buying overall has fallen since it spiked up in August, and that "sentiment is still fairly neutral."
Meanwhile, some analysts point out that a management buyout isn't always a sign that shares are undervalued. In fact, some companies may choose to go private to avoid scrutiny from the Securities and Exchange Commission, which has become much more intense in recent months.
Larraine Segil, partner at the Lared Group and professor of executive education at Caltech, said Martha Stewart, who has a controlling interest in Martha Stewart Living (MSO), could potentially buy back all the outstanding shares not only because they are 70% off their high, but also because a public-to-private transaction would preclude the firm from future regulatory action. Martha Stewart is currently under investigation for her sales of Imclone (IMCL), which prosecutors allege were based on insider information.Even if companies have nothing to hide, however, some firms may find the costs of being a public entity now outweigh the benefits. With share prices down sharply over the last two years, liquidity has proven to be elusive. At the same time, new regulations -- most notably the Sarbanes Oxley Act, which tightens corporate disclosure standards -- have increased compliance costs. New laws also subject CEOs to greater liability and give shareholders more power to prosecute officers and directors. The fear of civil and criminal penalties could drive some smaller companies out of the public arena. "Working in a public environment is counterproductive for people who are transacting business," Painchaud said. "Why deal with constant inquiries from the SEC? It's energy draining." Whatever the reasons behind a management buyout, analysts say they are generally positive for investors -- at least if they ultimately work out. Jonathan Moreland, director of research at InsiderInsights.com and a contributor to TheStreet.com's sister site RealMoney.com, said some executives have little intention of actually going through on an MBO. But, much as a company might announce a share buyback program, management buyouts are sometimes floated simply to boost confidence and raise the share price. "They may be trying to just talk up the stock," he said. "If they go through with it, that's great."
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