Don’t Ignore the Fundamentals: How to Succeed in Today’s Take-Private Marketplace

Take-private transactions, long considered a mainstay strategy for private equity (“PE”) firms, provide an avenue for businesses seeking transformative changes. This move can allow companies to step back from the rigorous demands of quarterly reporting, providing room to revamp their cost structure and adapt to a new business model that responds to shifting market needs. It may appear obvious that sponsor/management alignment, an in-depth value creation strategy, and data & analytics are pivotal to a successful take-private transaction. However, failing to pay due attention to these foundational elements can place the deal’s success in jeopardy. Importantly, an underappreciated factor in creating a comprehensive investment thesis involves accurately estimating potential cost savings and efficiencies associated with transitioning to private status, with regulatory and compliance cost savings being a key consideration.

Recently, the increase in take-private activity can be attributed to the blend of prolonged macroeconomic uncertainty, stock market fluctuations, dwindling valuations, and difficulties faced by public companies seeking additional equity or debt amid unstable interest rates. These challenges have been amplified by the substantial pool of private equity “dry powder” – estimated at $3.2 trillion by data firm PitchBook – fueling deal volume.

To put this into context, recall 2022 when the S&P 500 plummeted 20 percent and inflation soared to a level not seen since 1981. Interest rates also hit a multi-year high as part of the Federal Reserve’s strategy to combat inflation, leading to increased borrowing costs and diminished returns. The ensuing financial stress led public companies to struggle. During the 2022 market crash – notably in the tech sector – announced take-private deals totaled $258 billion, significantly surpassing the total annual value of such deals in 2021.

Consider the following points, which may seem self-evident to private equity sponsors keen on creating value through privatization in the current climate. Nevertheless, these aspects are crucial for success, and a lack of due attention can lead to significant complications.

1. Alignment between sponsor and management

Going private opens doors to robust value-creation actions such as divesting a segment, spinning off an asset, or merging with a competitor. Achieving this transformation, however, requires true alignment between the sponsor and the management team. A PE investor taking a company private is often more equipped to handle associated risks than the company itself. But, clear strategic alignment around objectives and a shared vision for reaching them is essential for a successful outcome.

It may seem like there is a shared vision at the outset, but to avoid divergence down the line, both sides of the partnership should ask themselves the following questions:

• Where should the business be several years down the road?
• Is there agreement on foundational infrastructure and technology needs?
• What do opportunities look like for value creation after a future exit?
• Is the right human capital in place to guide success? Is strategic vision paired with functional expertise?

Financial backing from a private equity sponsor is only the beginning of a yearslong journey to growth, and there should be alignment around both near and long-term goals for the business. These shouldn’t be an outside imposition, but a collaborative effort. Familiarity with the unique needs and nuances of an industry sector is also a must, and a good way to authentically build trust with the company management team.

2. Investment Basis to Granular Value Creation

The preparation and strategy phase begins with analyzing the viability of going private, consideration of possible alternatives, and a granular path forward to value creation. The process of conducting a take-private itself must begin with a thorough review of the strategic appropriateness of the transaction from the investor’s point of view, raising many questions such as:

• Is the target company’s share price depressed relative to the business’s intrinsic value?
• How does the company’s performance, capital allocation, and valuation multiple compare to its industry peers
• What is the path to increased profitability through a take-private?
• Can the company expedite its strategic plan or reposition itself in the market more rapidly?
• Is there execution risk in this type of transaction, and if so, to what extent? Can it be mitigated?
• What is the potential impact on the company’s capital allocation and financing alternatives under a private equity ownership model?
• What is the effect of a change in the existing and future investor base?

Additionally, an integral part of the value creation strategy involves identifying and quantifying potential cost savings. For instance, going private can minimize regulatory and compliance costs associated with being a public company, such as audit, legal, consulting fees, and listing fees. This evaluation should include an in-depth financial and operational analysis, leveraging data and analytics to identify efficiencies, optimize operations, reduce overheads, renegotiate supplier contracts, and restructure the company’s capital.

3. Fully Leveraging Data & Analytics

Robust data & analytics capabilities are no longer a “nice to have,” but a need to have to support successful execution of an investment thesis and value creation. For private equity sponsors pursuing a take private, the ability to closely analyze all aspects of a company can help inform the viability of the deal itself and best path to value creation. Companies are generating more data than ever, and a sophisticated process to capture, house, analyze, and action that data can make the difference between future success or failure. However, even multibillion-dollar companies have challenges with data management, business intelligence, and advanced analytics needs, so a private equity sponsor is in a unique position to provide the technical guidance and leadership to help change course.

Properly leveraged by the private equity sponsor and management, data insights can help front line sales teams decide which opportunities to pursue, allow an operations manager to consolidate material or fulfillment logistics, and make it easy for the office of the CFO to handle all necessary reporting. Properly integrated, data & analytics technology can streamline operational and reporting needs, and make it easy to integrate company data feeds into the private equity firm’s master data governance strategy. True “table stakes” for every deal.

While there are many steps to a take-private transaction and challenges to be considered, it’s easy for even the most seasoned experts to overlook what seem to be obvious points. While complex strategies can be strategic differentiators, private equity sponsors should not overlook the fundamentals. They are foundational to a comprehensive and thoroughly organized approach and enable private equity firms to produce excellent opportunities for value creation and return on invested capital, as well as a healthy transformation of the company itself.