Piercing the Veil

Corporate Research E-Letter No. 6, November 2000

Piercing the Veil: How to Gather Information about Privately Held Companies

by Philip Mattera

When the average person thinks about business these days, what is apt to come to mind are the companies that trade on the stock markets. The rising share prices of the late 1990s, the wave of initial public offerings and the advent of online trading have combined to cause many people to be obsessed with the daily gyrations of the Dow Jones Industrial Average and the NASDAQ. Publicly traded companies, however, make up only a small fraction of the universe of U.S. business enterprises. Only about 10,000 companies trade publicly on the major exchanges, while there are roughly 5 million corporations doing business in the country, according to tax return statistics compiled by the Internal Revenue Service.

The world of privately held companies is no longer characterized only by small firms. According to the latest compilation by Forbes magazine (in its November 27, 2000 issue), there are some 245 private companies with annual revenues of $1 billion or more. A dozen of those firms have 50,000 or more employees. Although the main trend in recent years has been for private companies to go public to take advantage of the bull market, there has also been some movement in the opposite direction, as leveraged buyouts return to the scene. Last month, for instance, a fund controlled by Donaldson, Lufkin & Jenrette agreed to pay more than $2 billion to buy out the country's largest meat producer, IBP Inc., and take it private.

As a consequence of all this, labor unions, community organizations and environmental groups increasingly find themselves confronting privately held companies and thus need to know how to investigate them.

There is an inclination among activists to assume that private companies (also known as closely held corporations) are impenetrable. While it is true that most of the detailed information on financial results, executive compensation and the like that public companies have to divulge in their Securities and Exchange Commission filings is not available for private firms, they are not complete black boxes.

The first thing to keep in mind is that some private companies are required to file certain SEC reports. A company may be private in the sense that its shares do not trade publicly, but many larger private firms sell bonds and other debt securities to the public and thus have to make SEC filings such as the 10-K annual report. When researching a large private firm, it is always worth searching websites such as Free Edgar (www.freedgar.com) that provide access to SEC filings.

For basic information on larger private firms, check the Hoover's website (www.hoovers.com), which provides brief profiles of thousands of public and private companies. Hoover's also offers more detailed descriptions of companies on an enhanced version of its website that is available on a subscription basis.

Overall, the most valuable source of information on private companies--from the billion-dollar giants down to mom-and-pop operations is Dun & Bradstreet. The primary business of D&B is to formulate credit ratings for millions of companies by finding out how promptly they pay their bills. In the course of doing this, D&B also collects basic data on millions of firms. At one time, the only way to gain access to D&B's descriptive information was to subscribe to its credit rating service. D&B now has a website (www.dnbsearch.com) that sells access to what it calls Business Background Reports. These reports--which currently cost $23 each--include a brief company history; basic financial data (usually an estimate of annual revenues and net worth); the names of directors and Top officers, with some biographical information; a description of the company's operations, including an indication of how many customers it has and the geographical scope of its markets; the number of employees; and a summary of recent developments.

One caveat about D&B information: it is not as reliable as the information a public company puts in its SEC filings. It is against the law to deceive the SEC; there is no legal penalty for embellishing the truth when filling out a D&B questionnaire. Companies will not lie with abandon, since they don't want to damage their credibility, yet it is always worth taking D&B data with a grain of salt.

As for other sources of information, keep in mind that there are numerous areas of public records that cover private as well as public companies. Here are some of the key ones:

State Corporation Records. Each corporation must be chartered with a particular state and also register with other states in which it does business. The amount of information in these corporate records vary from state to state but they often include the names of directors and Top officers. These records are kept by each state's Secretary of State. A few states have put the information on the Internet, and about 40 of the states provide it to database services such as Lexis-Nexis.

Uniform Commercial Code Filings. These are public documents filed when property such as industrial equipment is used as collateral for a loan. By looking at the volume of UCC filings and the names of the parties providing the loans, one can get clues as to the current operations of a private company. These filings are also available from the state Secretary of State or database services such as Lexis-Nexis.

Real Estate Records. Like any other owner of real property, private companies must file documents with local authorities when they buy or sell land and structures. Deeds, mortgages and property tax records are also public information, which can be accessed at local government offices or in some cases online.

Litigation, Judgments and Bankruptcies. Private companies sue and get sued just like public ones. Sometimes they also go bust. Court documents often reveal a great deal of information about private companies that would otherwise never come to light. See Corporate Research E-Letter No.4 for a description of how to retrieve information about a company's legal track record. Tax liens are also a matter of public record.

Workplace Safety and Environmental Records. The Occupational Safety and Health Administration has a website (www.osha.gov) that contains detailed records of every workplace inspection performed since the agency was created. The Environmental Protection Agency website (www.epa.gov) includes establishment data from the Toxics Release Inventory and other databases on hazardous materials.

Employee Benefit Plans. Every employee benefit plan must file a Form 5500 with the U.S. Department of Labor. These documents can provide clues about the working conditions in a private company. Complete copies of the 5500s must be obtained from the Labor Department, but a website called Free ERISA (www.freeerisa.com) provides summaries of the key information in the forms.

Government Contracts. The U.S. General Services Administration assembles information on every procurement contract above $25,000 awarded by the federal government. This database, which can be searched by contractor name, is available on CD-ROM and now on the web (fpds.gsa.gov/fpds/fpds.htm)

Campaign Contributions. Full information on the contributions made by corporate political action committees can be found on websites such as that of the Center for Responsive Politics (www.opensecrets.org). Company contributions at the state level can be found through the site of the National Institute on Money in State Politics (www.followthemoney.org).

The Media and Specialized Reference Books. Apart from public records, additional information on private companies can be found in the media, particularly the trade press and local newspapers that cover the town in which a firm is headquartered or has a large facility. The fact that the full text of thousands of such publications are now available online makes it possible to retrieve articles rapidly. If possible, bypass general Internet search engines and use better organized databases such as Lexis-Nexis and Dow Jones News Retrieval. It is also worth checking out specialized business reference works. For example, the Thomas Register, a multi-volume work that is now also on the web (www.thomasregister.com), is a comprehensive listing of all industrial products, listed according to company as well as category. Just about every industry has its own directories of companies, often with limited financial information and the names of key personnel. There are also industrial directories for specific states and cities.