Private Equity (PE) companies spent a record $226.5 billion in global takeover transactions in the first half of 2022, which is 39% more than the same period in 2021. While overall merger and acquisition (M&A) activity slowed significantly in the second half of last year with With stock market volatility, the volume of large acquisitions by PE companies looking to capitalize on a period of low valuation expectations is picking up as a result of bottoming valuations and a large supply of public company targets.
When public companies are underperforming, PE companies looking for capital value creation opportunities are eager to buy and take these organizations private.
Despite the peaks and troughs of the business cycle, these types of transactions represent a large and growing part of overall M&A activity. With this growth in the volume of PE-supported transactions, it is increasingly important to understand the basics of these transactions and the potential implications for key stakeholders, including the acquired company’s customers, partners, and employees, particularly those who are left with doubt. How the acquisition will affect them.
Why do PE companies buy publicly traded companies to take them private?
PE firms are investment funds that specialize in buying underperforming businesses with the goal of improving performance and selling the business later for a profit. While private equity firms can also buy private companies or acquire minority stakes in companies, their traditional approach has in most cases been to acquire publicly traded companies and take them private.
The software industry has seen significant privatization 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 list). three or four years) are trading below their IPO valuations.
There are many reasons why a PE company chooses to purchase a publicly traded company. The most common ROI drivers (which are by no means mutually exclusive) are significantly improving cash flows from operations, fixing the company’s business operations, and taking advantage of untapped growth opportunities.
What happens after an acquisition is announced?
After the purchase agreement is signed and publicly announced, a deal will typically enter a pre-closing period of several months while regulatory approvals are processed, debt financing is obtained, and conditions of purchase are met. closing. During this pre-closing period, management of the acquired business typically freezes new investment, which often includes reduced hiring and the transition to short-term cost rationalization.
PE’s new owner will use this time to reaffirm his plans to change focus for the short and long term, including weighing the depth and breadth of cost cuts, changes in business practices and operations, and defining new strategic priorities. Unfortunately, these pauses and changes create a great deal of uncertainty and disruption for key stakeholders, especially employees and customers.
What happens after the multi-month pre-closing period?
Once all approvals and closing conditions are met, the acquisition will close. The company will go public and the PE company will officially own the company. Most PE companies have a playbook for streamlining the operations of newly acquired companies and will quickly begin to implement those strategies. Common changes include new leadership and a corporate strategy that reflects the PE firm’s long-term experience in managing economic cycles and industry-specific market nuances.
