Going private: A guide to PE tech acquisitions

Jeff Laborde, CFO of JAGGAER, has greater than 25 years of expertise finance expertise, together with heavy involvement in each operating non-public equity-backed software program corporations and transacting with PE companies in expertise M&A.

Non-public fairness (PE) companies spent a record $226.5 billion on take-private transactions globally within the first half of 2022, which is 39% greater than the identical interval in 2021. Whereas total mergers and acquisitions (M&A) exercise slowed considerably within the second half of final yr with fairness market volatility, the amount of huge acquisitions by PE companies trying to capitalize on a interval of lowered valuation expectations is rebounding on account of bottoming valuations and a big provide of public firm targets.

When public corporations underperform, PE companies in pursuit of fairness worth creation alternatives are keen to buy and take these organizations non-public.

Regardless of financial cycle peaks and troughs, most of these transactions symbolize a big and rising share of total M&A exercise. With this progress within the quantity of PE-backed transactions, it’s more and more necessary to perceive the fundamentals of those transactions and the potential implications on key stakeholders, together with clients, companions and staff of the acquired firm, particularly, those that are left to marvel how the acquisition will have an effect on them.

Why do PE companies buy publicly traded corporations to take them non-public?

PE companies are funding funds focusing on shopping for underperforming companies with the aim of fixing efficiency and promoting the enterprise later for a revenue. Whereas PE companies may purchase non-public corporations or take minority possession stakes in companies, their conventional strategy has most frequently been to purchase publicly traded corporations and take them non-public.

The software program {industry} has seen vital take-private exercise within the final yr — Coupa, Citrix, Anaplan, Zendesk, Duck Creek and extra — and the amount of such transactions is probably going to improve given many newly public software program corporations (these listed within the final three to 4 years) are buying and selling under their IPO valuations.

There are various causes a PE agency chooses to purchase a publicly traded firm. The most typical return on funding drivers (which not at all are mutually unique) are to considerably enhance money flows from operations, repair the corporate’s enterprise operations and reap the benefits of untapped progress alternatives.

What occurs after an acquisition is introduced?

After the buyout settlement is signed and publicly introduced, sometimes a deal will go right into a multimonth pre-closing interval whereas regulatory approvals are processed, debt financing is raised and shutting situations are happy. Throughout this pre-closing interval, the administration of the acquired enterprise typically freezes new investments, which regularly contains lowered hiring and the transition to near-term cost-rationalization.

The brand new PE proprietor will use this time to agency up its plans to shift brief and long-term focus, together with weighing the depth and breadth of price cuts, adjustments to enterprise practices and operations and defining new strategic priorities. Sadly, these pauses and adjustments create vital uncertainty and disruption for key stakeholders, particularly staff and clients.

What occurs after the multimonth pre-closing interval?

As soon as all approvals and shutting situations are happy, the acquisition will shut. The corporate will probably be de-listed and the PE agency formally owns the corporate. Most PE companies have a playbook for optimizing the operations of newly acquired corporations and can start to quickly implement these methods. Widespread adjustments embody new management and company technique reflective of the PE agency’s long-term expertise managing via financial cycles and industry-specific market nuances.