private equity (PE) businesses spent a record $226.5 billion global take-private transactions in the first half of 2022, which is 39% higher than the same period in 2021. While overall mergers and acquisitions (M&A) activity slowed significantly in the second half of last year due to market volatility, stock market, from large acquisitions by PE companies seeking to benefit from a period of lower valuation expectations, is recovering on the back of valuation troughs and a large supply of publicly traded corporate targets.
When publicly traded companies underperform, PE companies looking for equity value creation opportunities are eager to buy these organizations and take them private.
Despite peaks and troughs in the economic cycle, these types of transactions represent a large and growing share of total M&A activity. With this growth in the volume of PE-assisted transactions, it is becoming increasingly important to understand the fundamentals of these transactions and the potential implications for key stakeholders, including customers, partners and employees of the acquired company, particularly those who wonder how the acquisition will affect them.
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Why do PE companies buy publicly traded companies to delist them?
PE firms are investment funds that specialize in buying underperforming companies with the goal of improving performance and later selling the company for a profit. While PE firms can also buy private companies or take minority stakes in companies, their traditional approach has mostly been to acquire publicly traded companies and take them private.
The software industry has seen significant take-private activity over the past year – Coupa, Citrix, Anaplan, Zendesk, Duck Creek and more – and the volume of such transactions is likely to increase given the many new public software companies (those that have emerged in the last three to four years) are trading below their IPO valuations.
There are many reasons why a PE company chooses to buy a public company. The most common drivers of return on investment (which are by no means mutually exclusive) are significantly improving operating cash flows, improving the company’s operations, and exploiting untapped growth opportunities.
What happens after an acquisition is announced?
After the buyout agreement is signed and publicly announced, a deal usually enters a pre-closing period of several months while regulatory approvals are processed, debt financing is raised and closing conditions are met. During this pre-closing period, the acquired company’s management generally freezes new investments, which is often accompanied by fewer hires and the move to short-term cost rationalization.
The new PE owner will use this time to solidify its plans to shift short- and long-term focus, including weighing the depth and breadth of cost savings, changes in business practices and operations, and defining new strategic priorities. Unfortunately, these pauses and changes are creating significant uncertainty and disruption for key stakeholders, particularly employees and customers.
What happens after the pre-closing period of several months?
Once all approvals and closing conditions are met, the acquisition will close. The company is delisted and the PE firm becomes the official owner of the company. Most PE companies have a roadmap for optimizing the operations of newly acquired companies and will implement these strategies quickly. Common changes include new leadership and business strategy that reflect the PE firm’s long experience in managing economic cycles and industry-specific market nuances.
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