Market Update April-May 2007
Public-to-Private Commentary
As a part of Piper Jaffray, we regularly benefit from the expertise of the firm's investment bankers and research analysts. In this edition of our market commentary, we would like to share an insightful piece by Piper Jaffray's M&A group that examines the reasons public companies are receptive to "take-private" offers from private equity firms. Below are pertinent highlights of this article.
Public companies have both "internal" and "external/market-driven" motivations for pursuing going-private transactions. Internal factors include:
- Increased corporate governance requirements and costs due to Sarbanes-Oxley
- Heightened emphasis by boards to seek the value-maximizing strategy
- Substantial strain on management resources, including:
- Reporting and investor relations requirements
- Business and operating strategy diversion resulting from being public-near-term focus, such as managing quarterly results
There are also several external/market-driven factors that suggest going private activity will accelerate in the future.
- Abundance of capital available to private equity firms
- Attractive lending multiples
- Relatively high valuations compared to recent past
- Increased shareholder activism
- General stability of the M&A markets, which is feeding the confidence of boards of public companies and acquirers to engage in transactions
- Strong financial performance of potential targets over the last few years, which makes realization of "full value" in a going-private transaction more likely
Moreover, small-cap and, to a lesser extent, mid-cap companies tend to have unique reasons for seeking going-private transactions. These include:
- Disproportionate impact of Sarbanes-Oxley and public company costs
- Several key benefits of being a publicly traded company are not realized
- Research coverage typically limited to larger companies
- Trading volume/liquidity tends to be lower
- Limited access to capital markets for growth capital
- Valuation discrepancy relative to larger counterparts
To request a copy of the full article, please contact Gretchen Postula.