Going Private: A Guide to PE Tech Acquisitions

Private Equity (PE) Companies spent $226.5 billion globally on personalized transactions in the first half of 2022, up 39 percent from the same period in 2021. Equity market volatility is picking up again due to lower volume of large buyouts by PE firms looking to capitalize on a period of low valuation expectations and a higher supply of public company targets.

When public companies underperform, PE firms chasing opportunities to create equity value are eager to buy and take these firms private.

Despite the peaks and troughs of economic cycles, these types of transactions represent a large and growing share of total M&A activity. With the growth in the volume of PE-backed transactions, it is important to understand the fundamentals and key stakeholders of these transactions, including customers, partners and company employees, who are particularly likely to leave confusion. How the purchase affects them.

Why do PE firms buy publicly traded companies to take them private?

PE firms are investment funds that specialize in buying underperforming businesses with the intention of improving performance and later selling the business for a profit. While PE firms can buy private companies or take minority ownership stakes in businesses, their traditional approach is often to acquire publicly traded companies and take them private.

The software industry has seen significant private activity in the past year — Kupa, Citrix, Anaplan, Zendesk, Duck Creek, and others — and the volume of such transactions is likely to increase with more new public software companies (listed previously). three to four years) trade below the IPO price.

There are many reasons why a PE firm might choose to buy a publicly traded company. The most common return on investment drivers (which are not mutually exclusive) is to significantly improve cash flow from operations, adjust the company’s business and use untapped growth opportunities.

What happens after the acquisition is announced?

After the purchase agreement is signed and disclosed, there is typically a several-month pre-closing period where regulatory approvals are processed, debt financing is raised and closing conditions are satisfied. In this pre-closure period, the management of the acquired business generally slows down new investments, which often involves a reduction in employment and a transition to recent cost-rationalization.

The new PE owner will use this time to strengthen its plans for a shift in short- and long-term focus, including weighing the depth and breadth of cost reductions, changes to business practices and operations, and defining new strategic priorities. Unfortunately, these pauses and changes create significant uncertainty and disruption for key stakeholders, especially employees and customers.

What happens after the multi-month pre-closing period?

Once all approvals and closing conditions are met, the acquisition will close. The company is delisted and the PE firm owns the company. Most PE firms have a playbook for optimizing the operations of newly acquired companies and quickly start implementing those strategies. Common changes include new leadership and corporate strategy that reflect the PE firm’s long-term experience with economic cycles and industry-specific market differences.