Public to Private - LBO

Is there any advantage in LBOs for going from public to private? Or is there similar opportunity in private buyouts?

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May 30, 2020 - 4:11pm

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

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