Exit Strategies for Public Companies: Going Private, Merger, or Acquisition Options

Estimated read time 11 min read

As someone who has been involved in the world of finance and investment for many years, I have seen first-hand the importance of choosing the right exit strategy for public companies. Whether it’s going private, a merger, or an acquisition, the decision to leave the public market can be a complex and challenging one.

Why Do you need an Exit?

Exit strategies are essential for public companies as they provide an opportunity for shareholders to realize value, allow management to focus on long-term goals, and provide liquidity for investors. But choosing the right exit strategy can be a daunting task, with many factors to consider, such as valuation, regulatory compliance, and shareholder interests.

In this blog post, we’ll explore three common exit strategies for public companies: going private, merger, and acquisition options. We’ll discuss the advantages and disadvantages of each, provide examples of companies that have used them, and share factors to consider when choosing the right exit strategy. By the end of this post, you’ll have a better understanding of the various exit strategies available and which one might be the best fit for your company.

Going Private

Going private is the process by which a public company becomes privately held, meaning that its shares are no longer traded on a public stock exchange. This typically involves the company buying back shares from its public shareholders, either through a tender offer or a going-private transaction.

There are several reasons why a public company might choose to go private. One reason is to reduce regulatory compliance costs, as private companies are subject to less stringent reporting requirements than public companies. Going private can also provide greater flexibility and autonomy for management, as they no longer have to answer to public shareholders and can focus on long-term strategic goals.

However, going private can also have some disadvantages. For example, it can be more difficult to raise capital as a private company, and the company’s valuation may be more challenging to determine without the transparency of public financial reporting. Going private can also be a lengthy and costly process, with due diligence and legal fees adding up quickly.

Despite these challenges, many companies have successfully gone private. One example is Dell Technologies, which went private in 2013 through a leveraged buyout led by its founder, Michael Dell. The move allowed the company to focus on its long-term strategy without the pressure of quarterly earnings reports and public shareholder scrutiny.

In terms of the process, going private typically involves a few key steps. First, the company’s board of directors will need to approve the decision and initiate a tender offer or going-private transaction. Next, the company will need to secure financing for the buyback of shares from public shareholders. Due diligence will also need to be conducted to ensure that the company’s valuation is accurate, and all regulatory requirements are met. Finally, the company will need to formally delist its shares from the public stock exchange.

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Overall, going private can be an attractive option for public companies looking to reduce regulatory compliance costs, gain greater flexibility and autonomy, and focus on long-term strategic goals. However, the process can be complex and costly, and it’s essential to weigh the advantages and disadvantages carefully before making a decision.

Mergers

A merger is a common exit strategy for public companies, where two companies combine to form a new entity. There are several types of mergers, including horizontal, vertical, and conglomerate.

Horizontal mergers involve two companies in the same industry and can result in cost savings, increased market share, and reduced competition. For example, the merger of Exxon and Mobil in 1999 created the world’s largest publicly traded oil and gas company, resulting in significant cost savings and increased market power.

Vertical mergers involve companies at different stages of the same supply chain. For example, a car manufacturer may merge with a tire company to control costs and streamline operations.

Conglomerate mergers involve companies in unrelated industries. The primary benefit of a conglomerate merger is diversification, which can reduce risk and provide opportunities for growth. For example, General Electric’s acquisition of NBC in 1986 allowed the company to diversify its operations and become a global media and entertainment conglomerate.

One of the primary reasons for a merger is to increase shareholder value. By combining resources and expertise, companies can often achieve greater efficiencies, reduce costs, and increase profitability, leading to higher stock prices and dividends. However, mergers can also be complex and costly, with potential challenges in integrating different corporate cultures, management styles, and operations.

The process of a merger typically involves due diligence, where each company evaluates the other’s financials, operations, and legal and regulatory compliance. Negotiations over the terms of the merger, such as the exchange ratio of shares and the new company’s management structure, can be complex and require the expertise of investment banks and legal advisors.

All in all, mergers can be a viable exit strategy for public companies, providing opportunities for cost savings, increased market share, and diversification. However, they require careful consideration and due diligence to ensure the merger benefits all parties involved, including shareholders, employees, and customers.

Acquisitions

Acquisitions are another common exit strategy for public companies. An acquisition is the purchase of one company by another, where the acquiring company takes control of the acquired company’s assets, liabilities, and operations.

There are several reasons why a company might choose to be acquired. For example, an acquisition can help a company to expand its product line, enter new markets, or gain access to new technology. It can also provide an opportunity for a company to realize a premium on its valuation or to exit a market that is no longer profitable.

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Acquisitions can take different forms, including friendly acquisitions, hostile takeovers, and leveraged buyouts. Friendly acquisitions occur when the target company agrees to the acquisition and the terms of the deal, while hostile takeovers involve the acquiring company making an offer directly to the target company’s shareholders, often at a premium to the current market price. Leveraged buyouts involve the use of debt financing to acquire a company.

While acquisitions can be a lucrative exit strategy for public companies, they also come with risks and challenges. For example, the due diligence process can be complex and time-consuming, requiring a thorough analysis of the target company’s financials, operations, and regulatory compliance. The acquiring company also needs to consider the potential cultural differences between the two organizations and how they will integrate the acquired company into their existing business.

Some examples of successful acquisitions include Facebook’s acquisition of Instagram in 2012, which allowed the social media giant to expand its offerings and reach a wider audience, and Amazon’s acquisition of Whole Foods in 2017, which gave the e-commerce giant a foothold in the grocery market.

When considering an acquisition as an exit strategy, it’s important to weigh the advantages and disadvantages carefully. On the one hand, an acquisition can provide access to new markets and technologies, increase market share, and generate a premium on the company’s valuation. On the other hand, it can also be a time-consuming and costly process, with potential challenges related to integration, cultural differences, and regulatory compliance.

Factors to Consider When Choosing an Exit Strategy

When considering an exit strategy, there are several key factors that public companies should keep in mind. These factors can influence the decision-making process and help determine which exit strategy is the best fit for their particular situation. Here are some of the most important factors to consider:

  1. Valuation: One of the most critical factors to consider when choosing an exit strategy is the valuation of the company. This is especially true for public companies, where the value of the company is often based on the stock price. Valuation can be affected by a variety of factors, including financial performance, market trends, and competition. Public companies should work with investment banks and financial advisors to determine a fair and accurate valuation before considering any exit strategy.
  2. Liquidity: Another important factor to consider is liquidity. Exiting the public market can provide liquidity for shareholders, allowing them to sell their shares and realize value. However, different exit strategies can offer different levels of liquidity. Going private, for example, can limit liquidity since there is no public market for shares, whereas an acquisition can provide immediate liquidity for shareholders.
  3. Regulatory compliance: Public companies are subject to various regulations and compliance requirements, such as SEC filings and public reporting. Exiting the public market can change these requirements and impact the company’s regulatory obligations. For example, going private can result in fewer reporting requirements, while an acquisition can lead to new regulatory compliance obligations.
  4. Shareholder interests: When considering an exit strategy, it’s important to keep shareholder interests in mind. Shareholders have invested in the company with the expectation of realizing value, and the chosen exit strategy should reflect their interests. Public companies should consider factors such as shareholder approval, shareholder payouts, and the impact of the exit strategy on their reputation.
  5. Due diligence: Finally, public companies should conduct due diligence when considering an exit strategy. Due diligence involves reviewing all relevant information, such as financial statements, contracts, and legal documents, to identify potential risks and issues. This is important to ensure that the chosen exit strategy is feasible and to minimize any potential surprises or negative consequences.
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Choosing the right exit strategy for a public company requires careful consideration of various factors. By taking into account factors such as valuation, liquidity, regulatory compliance, shareholder interests, and due diligence, public companies can make an informed decision that maximizes value for all stakeholders involved.

Quick Review

TypeDescriptionExampleAdvantagesDisadvantagesGeneral Type of Companies
Going PrivateThe process of a public company becoming a private company through the purchase of outstanding shares by a group of investors or the company’s management.Dell Technologies went private in 2013 for $24 billion.Reduced regulatory compliance requirements;
More flexibility in decision-making;
More control over company operations
Limited access to capital,
Limited liquidity for shareholders
Companies with strong cash flows and a desire for greater control over operations.
MergerThe joining of two or more companies to form a new company or the acquisition of one company by another.The merger between Disney and Pixar in 2006.Access to new markets and products;
Increased market share and scale;
Reduced competition
Integration challenges and costs,
Culture clashes,
Potential loss of key talent
Companies with complementary products, services, or capabilities.
AcquisitionThe process of one company purchasing another company, often for strategic or financial reasons.Facebook’s acquisition of Instagram in 2012 for $1 billion.Access to new markets, products, or technology;
Increased market share and scale;
Synergies and cost savings
Integration challenges and costs;
Cultural differences;
Regulatory hurdles
Companies with a desire to expand their product lines, customer base, or technology capabilities.

Wrapping Up

In conclusion, choosing the right exit strategy for public companies is crucial to ensure that shareholders can realize value, management can focus on long-term goals, and investors can access liquidity. The decision to leave the public market can be complex and challenging, with many factors to consider.

Going private, a merger, or an acquisition are three common exit strategies for public companies. Each has its advantages and disadvantages, and the right one for your company will depend on various factors, including valuation, regulatory compliance, and shareholder interests.

Ultimately, the key to a successful exit strategy is to approach it with a clear understanding of your company’s goals, strengths, and weaknesses. Conducting thorough due diligence, seeking advice from investment banks and legal experts, and considering the needs and interests of all stakeholders can help you make the right decision.

By considering the information and examples provided in this blog post, you’ll be better equipped to choose the right exit strategy for your public company. Remember that each company is unique, and the exit strategy that works best for one may not be the right fit for another. So take the time to assess your options carefully and choose the exit strategy that will help you achieve your long-term goals.

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