Amidst a tightening economy and market volatility, a wave of companies are ditching the headaches of public ownership for the quieter, controlled waters of private ownership. Is this the new refuge from economic storm?
The COVID-19 pandemic and the subsequent economic shutdowns created an unprecedented scenario for businesses globally. As governments injected liquidity into economies to stabilize markets and support businesses, many companies found themselves flush with cash.
This period of ample liquidity, coupled with regulatory changes such as the JOBS Act, which simplified the public listing process, and the boom in Special Purpose Acquisition Companies (SPACs), made it easier for a wide array of companies to go public with relatively little scrutiny.
Companies like Blue Apron and Peloton are prime examples of businesses that thrived during the post-COVID boom. The sudden increase in home-based activities, including cooking and home workouts, propelled their growth, leading to successful public offerings or significant increases in their stock prices.
However, as the initial pandemic conditions waned and normal economic activities resumed, these companies saw a significant drop in their stock valuations, reflecting the market's reassessment of their long-term value proposition and growth sustainability.
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That being said, in the "post-COVID" economic environment, several prominent companies are making headlines with their plans to transition from public to private ownership.
Recently, there's been a trend of companies across various sectors choosing to go private. For example, Nordstrom has been reported to be exploring a transition back to private ownership, driven largely by the founding family's interest in regaining more direct control.
Similarly, Everbridge, a critical event management software company, was taken private by Thoma Bravo in a substantial $1.8 billion deal, reflecting a strategic move to optimize its operations away from public market pressures.
23andMe, a consumer genetics and research company, is another firm that recently announced its decision to go private, which could be part of a broader strategic pivot or restructuring.
23andMe CEO Anne Wojcicki at Nasdaq Opening Bell Ceremony
Endeavor, the parent company of the Hollywood talent agency WME, is also reportedly in talks to transition to private ownership. The private equity firm Silver Lake is said to be negotiating a deal to take Endeavor private in a transaction valued at $13 billion.
Farfetch, an online luxury fashion retail platform, is also reportedly in discussions to go private. This is part of a broader wave of companies across different sectors considering similar moves, possibly as a strategic response to the current market dynamics or to streamline operations and governance away from the often intense scrutiny of public markets.
Why Companies Go Private
Strategic Flexibility and Operational Freedom: Private companies can operate without the constant scrutiny of shareholders and public market analysts. This allows for quicker decision-making and the implementation of long-term strategies without the pressure to deliver immediate results to satisfy market expectations.
Avoiding Public Market Pressures: Public companies are under constant pressure to meet quarterly earnings forecasts. This can lead to a focus on short-term financials at the expense of long-term strategic initiatives. Privatization removes this pressure, allowing management to focus on what's best for the company's future.
Cost Savings on Compliance and Reporting: Being a public company involves significant compliance costs with regulatory requirements, such as those imposed by the Securities and Exchange Commission (SEC) in the U.S. Going private can reduce these costs and administrative burdens.
The Process of Going Private
The process usually begins with a buyout offer, often from a private equity firm or a group of investors, including existing management. The offer must be approved by the company's board and its shareholders.
Financing is a critical component, typically involving a mix of equity from the buyout consortium and debt financing. After approval, the company delists from public stock exchanges and returns to private ownership, a process that can take anywhere from a few months to over a year, depending on the complexity of the deal.
Advantages and Disadvantages
Advantages:
Strategic secrecy: Private companies can keep their strategic initiatives secret from competitors.
Long-term planning: Freed from quarterly earnings pressure, management can focus on long-term growth.
Enhanced agility: Without the need for shareholder approval on major decisions, private companies can be more agile.
Disadvantages:
Financial burden: The process of going private can be expensive, involving hefty fees and potentially large amounts of debt.
Reduced liquidity: Shareholders may find their shares less liquid compared to those traded on public markets.
Pressure from new owners: While freed from public investors, private companies might face pressure from new private equity owners who expect a certain return on their investment.
Historical Success Stories
Several companies have successfully transitioned from public to private, reaping the benefits of such a move. One notable example is Dell Technologies, which went private in 2013 in a $24.4 billion buyout by its founder, Michael Dell, and investment firm Silver Lake.
The move allowed Dell to restructure its operations and refine its strategic focus away from the glare of Wall Street. Another example is Hilton Hotels, which was taken private by Blackstone Group in 2007, underwent extensive restructuring, and later returned to the public markets in 2013 in a highly successful IPO.
This trend towards privatization, stimulated by initial public market enthusiasm and subsequent strategic reassessment, marks a significant shift in corporate finance strategies. As companies adapt to the post-COVID economic landscape, the move towards privatization may continue to be a key strategy for those looking to refocus on foundational strengths and long-term growth away from the public eye.
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