Why Do Firms Go Private
Why Do Firms Go Private
Why Do Firms Go Private
AURLIE SANNAJUST* Assistant Professor in Finance University of Saint Etienne COACTIS Saint-Etienne
Wright, (2006); Desbrires, Schatt (2002); Sannajust (2009)). For this, we look at rst, the seven main reasons of PtoP operations which are: tax savings, reduction of agency costs, transfer of wealth (the debtholders to shareholders on the one hand and employees to shareholders on the other), the economics of trading costs, protection against the takeover, the under-valuation. In a second step, we elaborate a method to study the performance of these operations prior to presenting a synthesis of empirical research. And in a last step we focus on 3 specic cases.
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First, the collection of titles represents the preliminary stage because it is required for the withdrawing the need to have at least 95% of the company targeted by the PtoP. The second step is, to achieve the withdrawal of listing of the company. The offers of withdrawal are governed by the General Regulation of Financial Markets of the provisions of Chapters 1 and 6 of Part V. It states that the withdrawal of the rating can take the form of a takeover bid or the form of a public offer of exchange (share exchange offer). They should also target all the equity securities or provide access to capital and securities law to vote. Note that in the case of the study, withdrawal of the offer will materialize only by the fact that this withdrawal is initiated by the majority shareholder holding at least 95% of the voting rights of the listed company. Public offer of withdrawal launched by the majority shareholders are most often followed by a squeeze. Note that the threshold for holding of voting rights vary according to geographic areas identied (See Tab. 1). The principal observation that we note is that France has a very important tax threshold; it is the biggest (95%). This indication explains the poor number of PtoP in France compared to the others. It is a brake of their development.
First, it will not appeal more to the constraints related to ongoing monitoring of the operations by the market, Then it is no longer obliged to communicate the results of its activities, And nally, the costs associated with the listing will disappear. Unlike traditional buyouts, such as takeover bid or share exchange offer, PtoP are characterized by a massive use of debt, such as LBO. They are nanced by private equity companies. Moreover, the objectives of a take-over transaction are different from those of PtoP. The takeover bid or share exchange offer are primarily carried out by a major motivation which is the search for synergies between the target company and the company bought. Unlike the latter, the purpose of PtoP is not in a trade or industry association between two companies and do not represent the response of a penalty to poor management (which would have resulted in a loss of efciency). PtoP operations do not follow this logic; they are characterized as a group from target companies in relation to an acquisition. We discuss in the following paragraphs the sources of value and motivations that are related to PtoP transactions. Finally we can summarize in a few words the denition of a PtoP operation.
Public to Private (P to P) is to acquire a signicant block of shares in a listed company, to launch a tender offer and remove the company from the coast, possibly at the end of a squeeze-out.
Note: The operations of Public to Private, also called out of stock exchange, redeem a publicly listed company with a structure to leverage. Most often, those of LBO and LMBO (involvement of managers) who are retained.
Before studying the main sources of value creation, we illustrate our development of Public to Private with some examples. Indeed, we have selected all the delisted companies in November 2010 from different
Deutschland BAFin1
France AMF2
Italy CONSOB3
No threshold provided 95% of voting 98% by law. GA resolution rights required. 50% 95% 50%
United States SEC5 Requests to the Always possible with a SEC if a certain minimum number of vote of shareholders shareholders 75% 80%
BAFin : Bundesanstalt fr Finanzdienstleistungsaufsicht : autorit de rgulation nancire allemande AMF : Autorit des Marchs Financiers : autorit de rgulation nancire franaise CONSOB : Commissione Nazionale per le Societ e la Borsa : autorit de rgulation nancire italienne FSA : Financial Services Authority: autorit de rgulation nancire anglaise SEC : Securities and Exchange Commission : autorit de rgulation amricaine
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markets. From Euronext, we have 63 delistings which represent 133 548 769 (for example, we have Adecco and Ada from Paris; we have Colgate Palmolive and Mitsubishi from Amsterdam). From Alternext, we have 6 delistings which represent 635 595 (Laroche SA for Paris). And for Free Market, we have 55 delistings which represent 1 436 088 (Eurexia, Acropolis Telecom for Paris). All these transactions during November represent 135 620 452. If we take the same markets, we observe an evolution for December 2010 because the value of delisted companies represent 141 016 842.
III. Determination of
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development control system. The hypothesis of control implies that the gains made by shareholders in PtoP resulting mainly management system imposed by the management team in place.
bondholders not subject to protection clauses can lose part of the value of their investment.
III.6. ANTI-TAKEOVER
Another reason which may lead to the launching of a PtoP is the fear of being redeemed. In principle, after the takeover of a listed company, it is very probable that part of management lost their jobs. Many studies have investigated this case. We can cite some results of studies. In the UK, Kennedy and Limmack (1996) observed that 40.14% of companies acquired in the form of traditional buyouts, have replaced their CEO in the rst year following the acquisition and that 25.7% did it so during the second year. A more recent study conducted by Dahya and Powell (1998) estimated that 35.24% of the teams leave the company in the rst year of operation and 25.8% do it during the second year.
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In the United States, Martin and McConnell (1991) observed that 41.9% of the teams, leave their jobs in the rst year of operation. Therefore, a LMBO protects the leaders of this phenomenon. Management who is taking a signicant stake in the company, is covered against any potential hostile takeover.
Both authors think that the study of the performance of these operations should consist of four parts, these parts representing the various stages of the transaction. We will present the summary of this methodology.
Management and Firm going private under-performed but had more cash non management assets than industry peers, and had higher relative costs of compliance with Sarbanes-Oxley. led PtoP
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use any method, however, the results will be different. Indeed, the study of returns has the advantage to show the corrected results of the benets (unlike the method of calculating the premium). In addition, analysis of abnormal returns is a measure of the market on expected future prots of the company and includes the probability that the offer may fail as opposed to the method of premiums. The cancellation of a tender is a real fear for PtoP. Indeed as pointed out, DeAngelo, DeAngelo and Rice (1984), the loss of protability in 2 days can reach 8.88%. Marais, Schipper and Smith (1989) also conrm it.
Performance of companies after the PtoP transaction: According to Kaplan (1989a), the performance of these companies does not increase during the rst two years but from the third year, they experience a gain of 24.1%. His sample is based on 48 operations from 1980 to 1986. In addition, he noticed that PtoP have a better performance than quoted companies. Status of employees after the transaction: Kaplan (1989a) shows that the median employment increases of 0.9%. Muscarella and Vetsuypens (1990) note that there is no dismissal after an operation to PtoP. Lichtenberg and Siegel (1990) observe in a study of LMBO that productivity increased by 8.3% compared to the industry average over the three years following the transaction. Financial situation: Wright, Wilson, Robbie and Ennew (1996a) show that there is a low probability that PtoP go bankrupt because of their managerial effectiveness. We have summarized a few studies on the nancial performance of PtoP:
Table 3: Summary of studies for the Process Phase 3a: Impact of the organization after the PtoP
Authors Kaplan (1989) Country USA Transaction LBO Reverse LBO LBO LBO MBO,MBI Results Small increase in employment post buy-out but falls after adjusting for industry effects. Median number of employees fell between LBO and IPO but those LBO without asset divestment reported median employment growth in line with top 15% of control sample: divisional LBO more likely to increase employment than full LBO. Small increase in employment post buy out but falls after adjusting for industry effects. Small increase in employment post buy out. Average 6,3% fall in employment on MBO but subsequent 1,9% improvement by time of study.
Muscarella, USA Vetsuypens (1990) Smith (1990) Opler (1992) Wright, Thompson, Robbie (1992) USA USA UK
MBO and noProtability higher for MBO than comparable no-MBO for up to 5 years. MBO MBO, MBI MBO, MBI Accounting performance changes depend on vendor source of deal. Operating protability of Private-Equity backed buy-outs greater than for comparable no buyouts by 4.5% over rst three buy-out years. Returns to pre or post buy-out capital signicantly positive except for rms ending in distressed restructuring. Returns to post buy out capital greater when deal nanced with a greater proportion of bank nancing or when there is more than one private equity sponsor.
USA
PtoP
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These tables present the impact of PtoP transaction for their organization and their level of performance. Some remarks can be noted: Concerning the organization, for all the studies, the number of employees has a decrease trend. We can understand the result by the fact that managers have to reduce costs in order to avoid default because of the loan that implies the transaction. Concerning the performance, we observe a better protability and a higher return of investment.
Results Capex6 falls immediately following LBO. Capex and R&D fall immediately following LBO. MBO enhance new product development; 44% acquired new equipment and plant that would not otherwise have occurred. Reduction in R&D expenditure.
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Laure Le Nadant (2000), Stephane Onnee (1998), Sannajust (2009)). The best complete study is from Desbrires, Schatt (2002). It deals with the financial characteristics and changes in performance of French companies involved in a leveraged-buy-out from 1988 to 1994 with 161 MBOs from Diane as database. This study investigates more the second phase that we have presented before (phase Process). Indeed, they study the performance and the financial results after the transaction. For this, they construct a sample control in order to compare LBO deals and no-LBO deals. They make a univariate study. They conclude that after the transaction, the performance of French companies falls contrary to those in the United States and in the United Kingdom. This decrease of performance has more impact for family companies than for subsidiaries of groups.
Conclusion
Since a few years ago, we observe an increase of public to private transactions. This phenomenal was especially observed in the United States and in United Kingdom. In the recent years, a raise of PtoP is also remarkable in France. At this date, no study about the performance of PtoP with an international case has been realized thats the reason why this focus on adds some contributions. As we said, little research has been done except two main references: Wright (2006) for the United Kingdom and Desbrires-Schatt (2002) for France. It is one of the mail limit of this thematic. The aim of the paper is to make a synthesis of all studies and to list the main motivations of companies to go private. We retain seven motivations (tax saving, reduction of agency costs, transfer value from debt holders to shareholders, transfer value of employees to shareholders, economy of transaction cost, anti-takeover and undervaluation). By reference to various studies we observe that three principal motivations emerge: the level of FCF, the takeover threat and the under-valuation. This result can be applied for the international study (Sannajust, 2009). However, some limits can be mentioned. Indeed, the international dimension is a development to further explore. Whats more the beginning of the study of Asia is very important, because this country know these transactions since the early 2000s and become more and more important in terms of value transaction. Aurlie Sannajust would like to thank all the members of her PhD and especially Professor Philippe Desbrires for his help and valuable advice.
Note that in American literature, the term joint PtoP and LBO is often used. Indeed, as the PtoP, LBOs are nanced largely by debt. The distinction between the two is explained in terms of composite mode of nancing the debt: for example, PtoP with more than 50% debt nancing of the LBO debt. The distinction is quite subtle, we should analyze the nancial structure of each company, which is extremely difcult, which is why PtoP and LBO can be used simultaneously. When we employ LMBO, we refer to as the redemption of society made by its management team.
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