Public Companies - Taking the Privatisation Route

2022 has truly been the year of “take-privates”, fuelled by the highest global “take-private” activity in terms of deal values, recording an aggregate of $245bn across 91 public-to-private (P2P) transactions, exceeding 2021's record high of $239bn in deal value despite recording decline in volumes by 29% yoy.

What are these “take-private” transactions?

A "take-private" transaction means that a large private-equity group, or a consortium (group) of private-equity firms, acquires the stock of a listed entity. Due to the large size of most publicly listed companies, it is normally not feasible for an acquiring company to finance the purchase single-handedly. The acquiring PE group typically needs to secure financing from an investment bank or related lender that can provide enough loans to help finance the deal. The newly acquired target's operating cash flow can then be used to pay off the debt that was used to make the acquisition possible.

But, why would a company go private?

Public companies are subject to tremendous regulatory, administrative, financial reporting, and corporate governance regulations, mainly for shareholder protection in publicly listed companies. These activities shift management's focus away from operating and growing a company and rather involve the management bandwidth towards adherence to government regulations. The Sarbanes-Oxley Act of 2002 (SOX) in the US; The Companies Act, 2013 in India; and similar regulations in other countries, impose many compliance and administrative rules on public companies listed in their respective bourses.

Like it or not, public companies indulge in financial engineering in some way or the other to meet the market's earnings expectations. This short-term focus on the quarterly earnings report, which is dictated by external analysts, can reduce the prioritization of longer-term functions and goals such as research and development, capital expenditures, and the funding of pensions.

In light of the above, some clear advantages for publicly listed companies to go private include –

• Advantageous for companies languishing on stock markets
• Unapologetic focus on business, operations, and achieving the vision of the company
• A financial sponsor can work with management to transform a business without the burden of quarterly reporting hanging over their heads. Private companies can cope with more radical operational reorganizations and strategic pivots that may not be well understood by public markets.

These transfigurations may even be interpreted as value destructive in the short term, but ultimately deliver a stronger, more resilient, and sustainable company.

However, there are some disadvantages of going private too –

• Adding too much leverage to a public company to fund the “take-private” deal can impair an organization in adverse conditions, exposing it to both internal and external risks
• The shares become illiquid as a result of delisting, and the consequent lack of a regulated marketplace of buyers and sellers of these securities?

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Coming back to Take-private 2022…

North America has been the center of the take-private activity, accounting for 62% of the value and 45% of volume, mainly due to the reason that the US has the most populated and highly capitalized equity markets in the world. New York Stock Exchange counts more than 2,500 domestic and international companies, while the NASDAQ carries over 3,700. Together, these two equity capital markets account for ~$45tn of market capitalisation! The next 13 in the Top 15 stock markets around the world, together don’t account for that much market capitalisation. National Stock Exchange in India is amongst the Top-10, and accounts for ~$3tn of market capitalisation.

The Technology, media and telecommunications (TMT) sector topped the charts among the biggest P2Ps in 2022—eight out of the top-10 take-privates in 2022 involved TMT companies. Fun fact: Vista Equity Partners and Thoma Bravo, two software specialist PE firms, were responsible for half of the top-10 largest take-privates in 2022 –

Vista Equity Partners –

Citrix: The largest US take-private in 2022, in a deal valued at $16.5bn, involved Vista Equity Partners and Evergreen Coast Capital (part of activist investment firm Elliott Management) teaming up for Citrix, a cloud software-as-a-service (SaaS) company that provides server, application, and desktop virtualization and networking. Citrix has been merged with the existing Vista portfolio company TIBCO, a data analytics business that helps its customers predict business outcomes. Combining the two companies will join digital workspace functionality and real-time analytics into a single product that will benefit from hybrid working and ongoing enterprise digitalization.

• Share Price History – Citrix was bought at $104 per share in Sept-22
• 52-week low (16-Jun-22) – $88.66 (paid 17% premium on this)
• 52-week high (28-Jan-22) – $105.71
• Before deal rumour (20-Dec-21) – $83.65 (paid 24% premium on this)
• Citrix's failure to capitalize on the rise of virtual working during the COVID-19 pandemic led to its stock plunging 23% in 2021

Avalara: $8.4bn acquisition of the tax software giant – Avalara. Vista secured a $2.5bn loan from private lenders and brought in institutional investors as co-investors.

• Share Price History – Avalara was bought at $93.5 per share in Aug-22
• 52-week low (16-Jun-22) – $66.39 (paid 41% premium on this)
• 52-week high (4-Nov-21) – $188.43
• Before deal rumour (6-Jul-22) – $73.54 (paid 27% premium on this)
• Shares took a hit, as have many technology companies that previously prospered during the pandemic.

Thoma Bravo –

Anaplan: $10.4bn acquisition of Anaplan, which sells software that helps companies to plan, analyse, and act on finance, supply chain, and sales data to drive business performance.

• Share Price History – Anaplan was bought at $66 per share in Mar-22
• 52-week low (3-Dec-21) – $39.92 (paid 65% premium on this)
• 52-week high (1-Sep-21) – $70.25
• Before deal announcement (18-Mar-22) – $47.82 (paid 38% premium on this)
• Failed to capitalize on the industry boom and shares tumbled over 36%.

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Coupa: $8bn acquisition of Coupa, a business-spends management software. The acquisition was financed partly by a group of 19 direct lenders led by Sixth Street that provided a $2.6bn loan package; other direct lenders include HPS Investment Partners, Oaktree Capital, Apollo Global, and Blackstone; and a minority investment from ADIA.

• Share Price History – Coupa was bought at $81 per share in Dec-22
• 52-week low (8-Nov-22) – $40.29 (paid 100% premium on this)
• 52-week high (4-Jan-22) – $165.26
• Before deal rumour (22-Nov-22) – $45.58 (paid 78% premium on this)
• Shares took a hit, and profitability suffered due to debt financing, spending on marketing, advertising, and sales team

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SailPoint: $6.9bn acquisition of SailPoint, an enterprise identity security provider.

• Share Price History – SailPoint was bought at $65.25 per share in Apr-22
• 52-week low (28-Jan-22) – $34.98 (paid 87% premium on this)
• 52-week high (18-Apr-22) – $64.4
• Before deal announcement (8-Apr-22) – $49.59 (paid 63% premium on this)
• Unlike others, SailPoint was paid a high price for the acquisition. This is because cybersecurity was a hot sector for buyouts due to the pandemic-led shift to remote working as well as the Russian invasion of Ukraine that spiked the number of cyberattacks. SailPoint could accelerate the transition to a SaaS model without the scrutiny of being a public company, and fund potential transformative acquisitions with the dry powder from Thoma Bravo.

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Tech Winter of late 2022 saw valuations erode across the world after a pronounced sell-off of technology-related stocks throughout 2022. The Technology Select Sector Index was down by 25% yoy by mid-November (by February 2023, it was still down 11% yoy). However, SaaS has been a go-to sector for PE for years. Sticky recurring revenues from subscriptions align well with the industry’s leveraged financing model and companies continue to seek ways to optimize their operations to gain efficiencies, improve productivity, and unlock growth. Hence, it was only natural to witness such high volumes of “take-private” transactions in the SaaS space.

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Premium Paid Analysis

As you must notice from the above share price history, take privates are usually done on a value that is at a premium from the ongoing market prices. If you observe from the above examples, a range of 20-80% premiums are paid over and above the closing price before deal rumours come to the market.

Premiums paid analysis requires careful selection of comparable transactions to the proposed transaction. The transactions should have similar characteristics including transaction size, geography, and transaction consideration (cash/stock), if possible, in the last three to five years

To determine the unaffected share price, we must review the potential impact of deal leaks, public rumours, and speculations. To accurately calculate a premium, the pre-deal share price needs to be unaffected by the acquisition. Majority stake transaction premiums are generally higher than minority stake transactions due to control premiums.

Since strategic acquirers value synergies, premiums paid by strategics are typically higher than the premiums paid by financial?sponsors.

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Deal Protection for Acquiror (Investors taking private)

• No-shop provision: A "no-shop" provision in a merger agreement limits the public company's ability to seek competing offers. Unsolicited offers are allowed under go-shop provisions. Unsolicited offers are offers you receive when your business is not actively listed for sale.
• Termination fee: Termination fee is an amount of money paid by the new bidder/target group for terminating the agreed offer with the original buyer, whose offer activated the go-shop provisions.
• Blocking position: An acquirer can enter into an agreement with the public company requiring it to adopt a shareholder rights plan to discourage third parties from accumulating shares in the open market sufficient to maintain a "blocking position"?

Deal Protection for Target (Public Company)

• Special Committee: Special committees are formed to ensure that the majority of the public company's board has interests consistent with the interests of the stockholders (owners). It constitutes of independent directors to evaluate the proposed transaction. It is in their fiduciary duty to ensure that there are no conflicts of interest in the transaction.
• Go-shop provision: A go-shop period is a provision that allows a public company to seek out competing offers even after it has already received a firm purchase offer. The original offer then functions as a floor for possible better offers. The duration of a go-shop period is usually about one to two months.?

Take-private in Indian Context

The two main obligations under the Takeover Code in India concerning such acquisitions are (i) make a mandatory open offer in case the acquisition exceeds the specified thresholds (further detailed below), and (ii) obligation of the promoters and shareholders to make disclosures related to the shareholding beyond certain thresholds as specified.

An open offer is the process by which the acquirer provides an exit option to the existing public shareholders of the Target Company.

Timeline: A typical open offer timeline is c.3-4 months.

What triggers a mandatory open offer?

• Acquisition of a 25% stake in a listed entity triggers an offer of at least 26%.
• Creeping acquisition – for an acquirer holding over 25% (but less than the permissible limit of 75%) of voting rights that acquires an additional 5% in any financial year
• Acquisition of control – such as the right to appoint majority directors or control the management decisions

What must be the offer size of such a mandatory open offer?

• Minimum of 26% stake from existing public shareholders
• If the acquirer's shareholding crosses 75% post the mandatory open offer, it needs to reduce shareholding to below 75% within 12 months from completion of the open offer to comply with the minimum public shareholding requirements

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What must be the offer price of such a mandatory open offer? Shall be the highest of –

• The highest negotiated price under the SPA (share purchase agreement) which triggered the mandatory open offer
• Volume weighted average market price (VWAP) purchased by the acquirer in the 52-week period preceding the date of public announcement ("PA")
• The highest price paid by the acquirer during the 26 weeks immediately preceding the announcement
• VWAP for 60 trading days preceding the announcement for frequently traded stocks or price determined through valuation methods for low trading liquidity companies

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What is the timeline of events that follows for the mandatory open offer?

• Detailed public statement (DPS) for the mandatory open offer to be made within 5 working days of the acquisition announcement
• Draft Letter of Offer (DLoF) to be filed with SEBI for approval within 5 working days of publishing the DPS
• Mandatory open offer to be open for a period of?10?working?days

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Delisting Considerations: Option for a potential acquirer to directly launch an offer for delisting post signing of SPA with promoters or selling shareholders, done through reverse book building process. In the case, delisting is not successful then the acquirer will need to launch a mandatory open offer for at least 26%; an additional 3-4 months process post the delisting offer

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Other key approvals: Competition Commission of India ("CCI") and change of control-related?approvals

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Well, now that we understand Take-privates, we will get to know this better with some very famous examples in the upcoming case studies. The next article will be about one of the largest technology leveraged buyout ever, and also the largest company in terms of revenue to go from public to private in 2013. Until then, thank you for your time. Please post your feedback and comments.

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Please find below all the information sources that have been instrumental to the above article, along with some additional reading materials. Gratitude to all the creators –

1.????? The Companies Act, 2013

2.????? SEBI regulations

3.????? https://www.reuters.com/

4.????? https://www.thestreet.com/

5.????? https://mergers.whitecase.com/highlights/take-privates-boom-amid-the-equity-bear-market#

6.????? https://www.geekwire.com/2022/avalara-officially-goes-private-as-vista-equity-partners-completes-acquisition/

7.????? https://www.reuters.com/markets/deals/thoma-bravo-buy-coupa-software-615-billion-2022-12-12/

8.????? https://www.thomabravo.com/press-releases/sailpoint-to-be-acquired-by-thoma-bravo-for-6.9-billion

9.????? https://www.investopedia.com/articles/stocks/08/public-companies-privatize-go-private.asp

10.?? https://tradebrains.in/10-largest-stock-exchanges-in-the-world/

11.?? https://www.bakermckenzie.com/-/media/files/insight/publications/2020/08/global-take-private-guide_6aug2020.pdf

12.?? https://www.bakermckenzie.com/-/media/files/insight/guides/2022/baker_mckenzie_global_public_ma_guide_2022.pdf

13.?? https://www.lexology.com/library/detail.aspx?g=9ebdee55-e81e-4e12-a42c-1c25d786dbe0

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