What is a Going-Private Transaction?
- A going-private transaction converts a public company into a private company, eliminating the public shareholders and consolidating share ownership under one or a few shareholders.
- There are two common reasons a
going-private transaction is proposed:
- Management, or one or more shareholders of the target company, wants to buy-out the other public shareholders (called a Management Buyout or MBO)
- A third-party sponsor proposes to acquire the target company, with or without the support of management or a group of existing shareholders.
- Going-private transactions are also sometimes referred to as leveraged buyouts (LBOs) as the party leading the go-private will often finance the purchase through debt at the target operating company level.
Reasons to Go-Private
- To lessen the continous disclosure requirements placed on public companies by applicable securities regulatory authorities.
- To increase operational flexibility and focus on running the business with a view to maximizing longterm value.
- To reduce the expenses of being a public company, including financial reporting, regulatory, compliance, investor relations and professional services.
- To have an exit strategy for current shareholders or possible ways to achieve a transfer of business, more particularly with controlling shareholders.
- To lessen the likelihood of becoming a target of potentially opportunistic buyers.
- If a third-party LBO is proposed, going-private may provide the target company and its management with access to the sponsor's financial and operational expertise.
- For a sponsor, to take advantage of the opportunities resulting from weakened share prices.
- Determining whether a particular company is a good candidate for going-private will be subject to, in part, an assessment of whether or not that company can actually get the deal done. This will be dependent on the type of transaction that is being proposed, the availability of financing and the level of shareholder approval that will be required, as well as the likelihood of receiving it.
- A good go-private candidate will typically be strong, a leading player in its given industry, have substantial management depth, have a good client base, and have good cash flow and good margins. An ideal candidate will also be trading below intrinsic value, have a large block of shares held by insiders and be thinly traded.
- A formal valuation will generally be required in the context of a going-private transaction where the party proposing the go-private transaction (Offeror) is an insider or person acting jointly or in concert with an insider of the target company
- Under most going-private transactions, a plan of arrangement approved by a Canadian court will be utilized to effect the transaction and a judge will determine the fairness of the transaction. An understanding of the shareholder base and other stakeholders is important as all parties are given a forum to express an opinion and views on the transaction at the hearing.
Disadvantages in Being a Private Company
- The private company will not have the same access to public markets for financing in the future.
- Once the company is private, the remaining shareholders will no longer have a clear path to liquidity.
- Going-private transactions can be expensive (legal, accounting and advisory fees), complex and time consuming and cross-border transactions (e.g. U.S. Offeror and Canadian target) will add to such costs.
Originally published 18 June, 2020
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