Should your business go private?

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Twenty-six public companies went private this year as of mid-May, totaling more than $121 billion in value. Compare that to 47 companies that did the same throughout 2021, the most such deals in more than a decade, according to Dealogic.

Dry powder is partly fueling these deals as private equity firms compete to buy the best companies at the best prices, pushing them to look to the public markets for inspiration. In an environment of volatile stock prices, now at lows not seen in nearly a year and a half, public companies appear to be particularly attractive and cheaper bets. On the other hand, public companies have found it less and less attractive to be public, with stricter regulatory compliance and registration requirements. It also includes a responsibility to shareholders which, for some companies, inhibits research and development and risk-taking in the name of innovation.

Going private is a growing trend, and one that more councils might want to assess. For public company boards that are helping their organizations consider going private, here are the three main steps.

Assess the opportunity

With many workers back in the office and life returning to some semblance of normality – whether or not COVID-19 has made its way out – this pandemic era presents transformational opportunities for businesses and entire industries to rethink how they should do business in the future, taking into account all that has been learned about stakeholder wishes, employee needs and consumer habits during the pandemic.

“It’s much easier to take companies private to pivot strategic direction or business model without pressure from shareholders and regulators,” Claudia Fan Munce, director of Arteris, Best Buy Co. and Bank of the West, who served on CoreLogic’s board of directors until it was made private last year, said. She also has investment and venture capital experience. “[They can] go public again after the company recovers under new management.

According to Fan Munce, however, it is rare for a company to consider going private without reacting to outside pressure. Typically, the board would consider this option in response to shareholder challenges or proxy contests.

For Irene Chang Britt, director of Brighthouse Financial, MikMak and Victoria’s Secret & Co., and former director of Dunkin Brands Group when it was privatized in 2020, the deals she was involved in did not start with the question: Should we go private? “It was, should we sell? And sometimes it wasn’t because the company wanted to sell proactively, but because someone contacted us. Of course, the best time to sell is when you are not for sale, because you have a very good negotiating position.

In making their decision, boards can ask themselves and their CEOs the following questions:

  • Can we better serve our shareholders by going private?
  • Is the market valuing the company as it should? Or do we need time to make the strategy stronger and clearer?
  • How would privatization affect the balance sheet and how can we prepare for this impact?
  • How would the new owner optimize the business, and would the new owner optimize it in a way that would more successfully achieve long-term goals than if the business were in the public markets?
  • How would the new owner deal with the company’s brand and culture?
  • Would our employees and other constituencies be well served? Can we keep our customers and our talents?
  • What would be the response of our major institutional investors?

“Depending on the timing, institutional investors could see this privatization with funding from a [private equity] company as a lucrative outlet to cash in the winnings,” Fan Munce said, “in which case it is pressure on the company to consider the transaction.

Prepare for the transition

Once the decision has been made to go private, communication is key. Boards should oversee management as the team educates customers and affected communities about the transaction. Fan Munce suggests that holding a public hearing to address concerns before the transaction closes could be beneficial in obtaining and incorporating feedback into plans so that most stakeholders are satisfied with the results.

It is also imperative that boards review compensation structures for key executives and other employees to ensure their retention during the transition. That said, boards of directors, together with the companies’ future new owners, should assess whether the same people and skills will be essential to the company’s success as a private entity.

Councils must also be prepared for changes in their own ranks. “The formality and independence of the management team is replaced by direct oversight by investors, even at the execution level, and with more frequent checkpoints”, in the event that a private equity company investment would take the company public, Fan Munce said. “Very rarely do board members of public companies remain on the board when it goes private, because the investor has full control of whoever they want on the board of the private company. “

That said, for Fan Munce, a private company is more mission-driven and focused on growing the business and therefore relies more on its board of directors for operational guidance. “[This includes] connecting with customers, channels, key talent, and often even using its board to fill talent and expertise gaps in its leadership team,” she said.

“If you’re a respected member of the board of directors by the buyer, you’ll probably have conversations with the buying company or business because they’ll want to know from you, ‘How did you come up with that? What do you know? What is your advice? said Chang Britt. “You have the time, once all the legal and financial procedures have been completed, and the opportunity to have discussions, to give your opinion. This makes the transition easier. »

When preparing to close the transaction at a high level, boards should be sure to discuss the following issues with management:

  • What is our communication plan?
  • Which members of the management team will be essential to the success of the new strategy? What skills will we need in our leaders as a private company?
  • Can private enterprise benefit from keeping certain directors on board? What skills will be needed among the directors of the new private company?
  • If some directors leave the board after the transaction, what knowledge, expertise and institutional knowledge can the new owners learn from them before they leave?
  • Are there any conflicts of interest, and if so, how do we resolve them?
  • How do we mitigate the concerns of regulators, shareholders and other stakeholders about the transaction on an ongoing basis?

Plan for the future

What is the buyer’s exit strategy? This question should be asked and the answer, including timing, understood during the assessment phase. But once the transaction is complete, what happens next?

Privatization can allow a public company to more quickly iterate ideas and transformations. “It is very difficult to make medium-long term investments when companies are measured by their shareholders quarter by quarter. Very often, going private to accelerate investments can have an uplifting benefit for the future of the business,” Fan Munce reiterated.

That doesn’t mean being newly deprived is easy. Earlier this year, the United States Securities and Exchange Commission reported in a regulatory program that it was evaluating potential rules to compel more private companies to disclose certain information on a regular basis. This, combined with the fact that some public-private companies may eventually consider returning to public procurement, partly confirms the “why” behind the best practices of public company governance that largely remain in place after a privatization transaction.

Additionally, Chang Britt notes, “Private companies tend to be extremely disciplined because there are people whose money is right on the table. They are very interested in the performance of the board and the company. Innovation and transformation may have more room to grow in a private enterprise, but that doesn’t mean all processes and practices slack off during transition.

If the long-term intention of going private is to refocus the strategy, stay private, and avoid the costs and burdens of going public, or going public again in the future, by continuing to practice good governance with regulators and other stakeholders watching closely is simply smart. Because they are.

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