Well, there are a number of reasons why a company may decide to go private. Today, we’ll examine the major ones and show you the pros and cons of such an important transition.
What to expect being public
Let’s face it, there are advantages and disadvantages to going public. On one side, investors holding stocks in public companies have liquid assets. It is relatively easy to sell or buy public companies shares. On the other side, there are huge amounts of various bylaws and financial and administrative regulations that public companies are obliged to comply with. All these complicated regulations may distract the management from the company’s development and growth.
Besides the strict internal control of the companies’ financial reporting, public businesses must perform operational and financial engineering in order to satisfy Wall Street’s earnings expectations on a quarterly basis. This may shift the company’s focus from achieving the longer-term and eventually more important goals towards trying to show better short-term results.
Going Private. Why not?
Private companies’ investors may or may not have liquid investments. Private structure gives the companies’ owners more freedom to spend their time and efforts on improving and developing their business and making the company more competitive on the market.
Usually, private firms have investments with various exit timelines, depending on what was conveyed to and agreed with the investors. Though typically, the investment holding period lasts from four to eight years. This is a rather long period that allows business owners to concentrate on building long-term shareholder’s wealth.
A company’s management prepares and shows a business plan to the prospective shareholder(s) and coordinates the plan going forward. This plan basically depicts how the company is going to return the investments.
Going Private. Let’s see how
The ‘take-private’ transaction presupposes that a rather large private equity group or joint consortium of private firms buys the stocks of a publicly traded company. Due to the fact that public companies have huge annual revenues of millions and billions of dollars, the acquiring private equity group usually have to secure its financial capability with the help of the investment bank or another lender, who is able to provide large enough loans to finalise the deal.
Then the newly obtained operating cash assets can be utilised to repay the debt for the acquisition transaction. Sufficient shareholders’ returns are also a must-pay for the equity group.
Leveraging is a good way to decrease the equity amount needed to finance the acquisition transaction, as well as to increase the returns on the used capital.
Going Private. What for?
In an attempt to evaluate the acquisition transaction perspectives and further opportunities, investment banks and companies' management build relationships with private equity group.
As acquirers usually pay a 20-40% premium over the stock price, they may seduce the public company’s management, who are well-compensated, to go private. Also, the shareholders with the voting rights push the board of directors to execute the deal in order to gain an increased value from their equity holdings.
Consider your short-term and long-term plans
Thinking over the acquisition transaction with a private equity investor, the public company management team should weight up their short-term and long-term plans and perspectives.
- Thinking forward. Does it make sense to attract a financial partner?
- Leveraging. How much should the company take?
- Cash flow. How much should the company earn to cover the new interest payments?
- Future outlook. What do you think of the company’s future perspectives? Do they look overly positive or realistic?
The management should carefully analyse the acquirer’s track record and pay attention to the following details:
- Aggressiveness. Find out whether the acquirer has an aggressive position in leveraging the newly bought company.
- Market knowledge. Learn whether he is aware of the company’s industry.
- Power-holding strategy. Try to understand whether the acquirer wants to take an active position in the company’s management, or agrees to delegate the power.
- Contingency plan. Learn more about the exit strategy of the acquirer.
To conclude, we should point out that a take-private transaction can be rather an attractive option for many public companies. If the debt level is reasonable and the company feels secure steadily growing its cash flow, going private can eventually bring substantial long-term benefits both to the company and its shareholders.