Private equity (PE) firms spent a record $226.5 billion on take-private transactions globally 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 with equity market volatility, the volume of large acquisitions by PE firms looking to capitalize on a period of lowered valuation expectations is rebounding as a result of bottoming valuations and a large supply of public company targets.
When public companies underperform, PE firms in pursuit of equity value creation opportunities are eager to purchase and take these organizations private.
Despite economic cycle peaks and troughs, these types of transactions represent a large and growing share of overall M&A activity. With this growth in the volume of PE-backed transactions, it’s increasingly important to understand the basics of these transactions and the potential implications on key stakeholders, including customers, partners and employees of the acquired company, in particular, those who are left to wonder how the acquisition will affect them.
Why do PE firms purchase publicly traded companies to take them private?
PE firms are investment funds that specialize in buying underperforming businesses with the goal of fixing performance and selling the business later for a profit. While PE firms can also buy private companies or take minority ownership stakes in businesses, their traditional approach has most often been to acquire publicly traded companies and take them private.
The software industry has seen significant take-private activity in the last year — Coupa, Citrix, Anaplan, Zendesk, Duck Creek and more — and the volume of such transactions is likely to increase given many newly public software companies (those listed in the last three to four years) are trading below their IPO valuations.
There are many reasons a PE firm chooses to buy a publicly traded company. The most common return on investment drivers (which by no means are mutually exclusive) are to significantly improve cash flows from operations, fix the company’s business operations and take advantage of untapped growth opportunities.
What happens after an acquisition is announced?
After the buyout agreement is signed and publicly announced, typically a deal will go into a multimonth pre-closing period while regulatory approvals are processed, debt financing is raised and closing conditions are satisfied. During this pre-closing period, the management of the acquired business generally freezes new investments, which often includes reduced hiring and the transition to near-term cost-rationalization.
The new PE owner will use this time to firm up its plans to shift short and long-term focus, including weighing the depth and breadth of cost cuts, changes to business practices and operations and defining new strategic priorities. Unfortunately, these pauses and changes create significant uncertainty and disruption for key stakeholders, especially employees and customers.
What happens after the multimonth pre-closing period?
Once all approvals and closing conditions are satisfied, the acquisition will close. The company will be de-listed and the PE firm officially owns the company. Most PE firms have a playbook for optimizing the operations of newly acquired companies and will begin to rapidly implement those strategies. Common changes include new leadership and corporate strategy reflective of the PE firm’s long-term experience managing through economic cycles and industry-specific market nuances.
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Photo and Author: Walter Thompson