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Twenty-six public companies have gone private this year as of mid-May, totaling more than $121 billion in value. Compare that to 47 companies that did the same in all of 2021, the highest number of such deals in more than a decade, according to Dealogic.
Dry powder is partially fueling these transactions as private equity firms compete to buy the best companies at the best prices, pushing them to look at the public markets for inspiration. In an environment of volatile stock prices, now at lows not seen for almost a year and a half, public companies are looking like especially attractive—and cheaper—bets. On the flip side, public companies have found it less and less appealing to be public, with more stringent regulatory compliance and listing requirements. This also includes a responsibility to shareholders that, to some companies, inhibits research and development as well as risk-taking for the sake of innovation.
Going private is a growing a trend, and one that more boards might wish to evaluate. For public company boards helping their organizations consider going private, below are the three main steps.
Assess the Opportunity
With many workers back in the office and life returning to a semblance of normalcy—whether or not COVID-19 has actually made its retreat—this pandemic era presents transformational opportunities for companies and entire industries to rethink how they should do business going forward, taking into consideration all that has been learned about stakeholder wants, employee needs, and consumer habits during the pandemic.
“Taking companies private to pivot the strategy direction or the business model is much easier without the pressure of shareholders and regulatory bodies,” Claudia Fan Munce, a director of Arteris, Best Buy Co., and Bank of the West, who served on the board of CoreLogic until it was taken private last year, said. She also has experience investing and in venture capital. “[They can] come back out public again after the company reestablishes itself in the new direction.”
According to Fan Munce, however, it is rare that a company would consider going private without reacting to external pressure. Usually, the board would consider this option in reaction to shareholder challenges or proxy fights.
To Irene Chang Britt, a director of Brighthouse Financial, MikMak, and Victoria’s Secret & Co., and a former director of Dunkin Brands Group when it was taken private in 2020, the transactions she has been involved with didn’t start with the question: Should we go private? “It was, should we sell? And sometimes that wasn’t because the company wanted to proactively sell, but because somebody approached us. Of course, the best time to sell is when you’re not for sale, because you have an extremely good negotiating position.”
To make the 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 be? Or do we need time to make the strategy stronger and clearer?
- How would going private 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 deliver more successfully on long-term goals than if the company were in the public markets?
- How would the new owner treat the brand and company culture?
- Would our employees and other constituencies be well served? Can we retain our customers and talent?
- What would be the response from our large institutional investors?
“Depending on the timing, the institutional investors may view this going private with financing of a [private equity] firm as a lucrative exit to cash out the gains,” Fan Munce said, “in which case that is a 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 informs customers and relevant communities about the transaction. Fan Munce suggests that holding a public hearing to address concerns prior to the closing of the transaction might be beneficial to obtain and incorporate feedback into the plans so that most stakeholders end up happy with the results.
It is also imperative that boards review the compensation structures of key executives and other employees to ensure their retention through the transition. That said, boards, in conjunction with companies’ soon-to-be new owners, should assess whether the same people and skills will be essential to the success of the company as a private entity.
Boards should be prepared for changes among their own ranks, as well. “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 case that a private equity firm takes the company private, Fan Munce said. “Very rarely the board members of public companies remain as part of the board when it goes private as the investor has full control of who they want on the private company board.”
That said, to Fan Munce, a private company is more mission-driven and focused on the growth of the company and it therefore relies on its board more for operational guidance. “[This includes] connecting with key customers, channels, talents, and often even using its board to fill gaps of talents and expertise from its senior management team,” she said.
“If you are a respected board member by the purchaser, you will probably have conversations with the buying company or firm because they’ll want to know from you, ‘How did you think about this? What do you know? What is your advice?’” Chang Britt said. “You have a time, after all the legal and financial processes are done, and an ability to have some discussions, give your advice. That helps with the transition.”
While preparing for the closing of the transaction at a high level, boards should ensure that they discuss the following questions with management:
- What is our communications plan?
- What management team members will be essential to the success of the new strategy? What skills will we need in our leaders as a private company?
- Can the private company benefit from keeping certain directors on board? What skills will be needed in directors of the newly private company?
- If some directors will leave the board post-transaction, what insights, expertise, and institutional knowledge can the new owners learn from them before they depart?
- Are there any conflicts of interest, and if so, how are we resolving them?
- How are we alleviating regulators’, shareholders’, and other stakeholders’ concerns 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 the timeline—understood during the assessment phase. But once the transaction is complete, what happens next?
Going private can allow a public company to iterate on ideas and transformations more rapidly. “It is very difficult to make medium- to 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 to the future of the company,” Fan Munce reiterated.
That doesn’t mean that being newly private is easy. Earlier this year, the US Securities and Exchange Commission signaled in a rulemaking agenda that it was assessing potential rules to require more private companies to disclose certain information on a regular basis. This, combined with the fact that some public-to-private companies may plan to return to the public markets eventually, partly support the “why” behind public company governance best practices largely remaining in place after a go-private transaction.
In addition, Chang Britt notes, “Private companies have a tendency to be extremely disciplined because you’ve got people whose money is just sitting at the table. They’re very interested in how well the board and the company are doing.” Innovation and transformation may have more room to grow in a private company, but that doesn’t mean that all processes and practices relax during the transition.
Whether the long-term intent of going private is to refocus the strategy, stay private and avoid the costs and burdens of being publicly listed, or go public anew in the future, continuing to practice good governance as if regulators and other stakeholders were watching closely is simply smart. Because they are.