Public to Private - LBO
Is there any advantage in LBOs for going from public to private? Or is there similar opportunity in private buyouts?
Is there any advantage in LBOs for going from public to private? Or is there similar opportunity in private buyouts?
Career Resources
Take-privates present a unique opportunity different from private buyouts. In a theoretical world, the public markets are perfect (everything is valued correctly) and there are inefficiencies in the private markets, but sometimes it goes the other way.
A PE firm will target a public company they consider to be undervalued by the public markets, and believe would far better as a private enterprise. This is initially spotted by a gap between the TEV/EBITDA multiple of the public company and its private company peers (some would argue this can be explained by differences in growth, quality etc. but a PE firm may have a contrarian thesis). The thesis revolves around the various reasons it could be undervalued: * Recent bad news - a scandal, bad PR, executives complications - some companies have legacy events weighing down their stock prices * Pressure of quarterly reporting, which may prevent internal investment, R&D and product development projects - many PE firms believe they can create better companies with better products if they are out of the eye of public markets for an extended period of time e.g. Advent / Forescout (Forescout's quarterly reporting has weighed on its stock price) [Advent pulled out of the deal due to COVID]; Siris / Travelport (the bet here was likely that Travelport could trade at a much higher "sexy" fintech/payments angle in the private markets) * Making a major transition - in recent times, this is often an on-premise to cloud SaaS revenue model transition, which has a high risk of failure so public markets will often punish the company for it. PE firms can shepherd the company through such a transition. E.g. Thoma Bravo / Instructure, when Instructure was shifting to its new Canvas product * "Under-the-radar" low volume stocks - some companies have great fundamentals but don't get enough traction / coverage in the stock markets * Geographic arbitrage - many European tech companies have historically been undervalued relative to their US peers. Again, could be explained by geographic macro factors (Europe is slower growth) but a PE firm may believe otherwise * Opportunity for a strategic merger - a PE firm may combine the public company with a major private competitor it owns e.g. H&F's Ultimate Software + Kronos, Permira's Knot Worldwide + WeddingWire, Veritas' athenahealth + Virence Health
Super helpful, thank you!
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