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Private Equity-Backed Delisting: Drivers and Implications
Publication date Jul. 23, 2024
Summary
In recent years, there has been a significant increase in going-private deals in major stock markets globally. Similarly, Korea has recently witnessed going-private transactions led by private equity funds. Despite the various benefits of being publicly traded, a private equity-backed delisting is carried out to relieve the management burden from disclosure obligations, stock price volatility, and the administration of common shareholders. This allows management to focus on long-term business strategies and value enhancement. Although going-private deals can enhance shareholder value through stock price increases, it is impossible to exclude the possibility of conflicts of interest and information asymmetry due to the transaction structure in which the private equity fund as the major shareholder is the buyer and common shareholders are the sellers. To facilitate a smooth delisting through a tender offer, it is necessary to dispel the distrust of common shareholders regarding the tender offer price, which requires providing more information on the appropriateness of the offer price. It is also crucial to refer to overseas cases to ensure the fairness of procedures, including the transaction price in M&A deals where conflicts of interest may arise.
Background
Recently, going-private deals1) led by private equity funds has been increasing in the US and European stock markets, as well as in Asian markets like Japan and South Korea. In the US, the private equity industry experienced two going-private waves: the first in the 1980s and the second from the 1990s to the mid-2000s. The current trend is considered the third wave, which began after the Covid-19 pandemic. In the past few years, going-private transactions in the US have surged from 28 cases worth USD 42 billion in 2016 to 45 cases worth USD 270.4 billion in 2022, before declining to 33 cases worth USD 75.5 billion in 2023 amid Fed rate hikes. Meanwhile, in Japan, going-private deals began to emerge in the mid-2000s as private equity investments in the country increased. This trend has also seen a sharp rise since the Covid-19 pandemic. In Japan, public-to-private management buyouts (MBO), which were 12 cases in 2022, climbed to 18 in 2023, reaching an all-time high in the past 13 years.2) Notably, in 2023, Toshiba, one of Japan’s leading listed companies, was removed from a stock exchange following a tender offer by a Japanese private equity consortium. In Korea, after a few going-private transactions occurred in the early 2010s, the trend has gained momentum since 2023, with several major private equity firms initiating tender offers leading to delisting. In 2023, Osstem Implant and Lutronic were delisted following tender offers led by private equity funds, and as of 2024, tender offers have been made or are underway to take publicly traded companies private such as Ssangyong C&E, LocknLock, and ConnectWave.
Motivation for going private
To identify the motives behind going-private transactions, it is necessary to understand what drives companies to go public. The primary motivation for going public is to raise capital from stock market investors. In addition, listing ensures liquidity in stock trading and provides a means of wealth diversification through on-exchange share disposal by founders and major shareholders, as well as performance-based compensation such as stock options for employees and executives. Beyond these direct motives, there are intangible benefits to being a publicly traded company, such as certification and visibility effects. Also, founders, employees and executives may feel a sense of pride from being part of a listed company. On the other hand, the most significant costs associated with going public and maintaining a listing include compliance expenses related to various listing regulations, such as disclosure requirements, the costs to manage common shareholders, and the burden on management to meet the demands and expectations of stock market investors. These factors can put pressure on management, affecting their ability to set and execute long-term strategic plans.
Evolution of private equity-backed delisting
While there are common drivers of going-private deals in foreign capital markets, they are also influenced by timing and geographic differences. The first going-private wave in the US in the 1980s occurred in the midst of a massive M&A boom characterized by hostile takeovers involving corporate restructuring of listed companies. Through the junk bond-financed leveraged buyouts (LBOs), private equity is considered to have significantly contributed to streamlining the operations of bloated public companies. While the first wave focused on large companies in mature industries, the second wave in the 2000s shifted focus to mid-sized private companies in growth industries. This shift occurred because extensive corporate restructuring took place during the first wave, reducing similar investment opportunities. Moreover, factors such as low investor recognition, lack of stock liquidity, and increased costs of maintaining a listing due to the Sarbanes-Oxley Act (SOX) led emerging or small public companies to opt for going private. During this period, the financing for corporate takeovers was primarily facilitated by low interest rates and the growth of the asset-backed securities market. Meanwhile, the third wave, starting in the late 2010s, has been spurred by a variety of factors. Similar to the second wave, it has mainly involved growth companies seeking to go private. However, additional factors such as the US-China trade dispute, the Covid-19 pandemic, stock price declines resulting from rising interest rates, and the strong presence of activist funds have also contributed to this wave. Notably, many technology companies, which went public through IPOs or SPACs during the Covid-19 period and experienced poor stock performance subsequently, have been targeted for delisting by private equity funds. In terms of acquisition financing, private debt, which has seen significant growth since the 2010s, has replaced traditional acquisition financing, providing the necessary funds for corporate acquisition.
Going private and value enhancement
Academic analyses of foreign delisting cases demonstrate that going-private deals enhance shareholder value through stock price increases or going-private premiums. For instance, the event study on going-private transactions during the first wave in the US indicates that the disclosure of tender offers for delisting resulted in cumulative abnormal returns (CAR) of approximately 20% for a 3 day period surrounding the disclosure date. It also suggests that during the second wave, stock prices increased to levels comparable to the first wave, albeit with a slight decline in CAR. In addition, the going-private premium—the difference in stock price between the final takeover share price and the pre-announcement price—was reported to be around 45% during the first wave and approximately 30% during the second wave.3)
The increase in shareholder value through going-private transactions can be attributed to several factors. One primary reason is that the private equity firm and the company’s management can focus on corporate performance and enterprise value while the company remains private. Other factors include the potential for preventing inefficient management and waste of resources through monitoring by private equity firms, the elimination of listing costs, protection from hostile takeovers, and investment returns derived by acquiring undervalued public companies (Renneboog et al., 2017). In recent going-private deals led by both domestic and foreign private equity funds, the primary drivers likely include the possibility of focusing on corporate financial performance and long-term strategy, the removal of listing costs, and investment returns from acquiring undervalued public companies.
Recent going-private transactions in Korea
Recent going-private deals by domestic private equity funds have garnered significant attention in that they have been rarely witnessed in Korea’s stock market. While investments through delisting have been active in the US since the early days of private equity, this trend has only come to the fore in Korea nearly 20 years after the introduction of private equity funds in this country. The increase in going-private transactions in Korea is driven by the continuous growth in the amount of capital raised by private equity funds and the growth of leading private equity firms. In this situation, the limited availability of private companies suitable for substantial buyouts has prompted private equity funds to pursue buyouts of publicly traded companies. As seen in foreign cases, the growth of the acquisition finance market has also played a crucial role in the increase in going-private transactions in Korea. On top of that, buyouts for listed companies have been rarely executed, opening up opportunities to enhance enterprise value through unique corporate governance improvements by private equity funds. In Korea, private equity funds investing in listed companies have typically focused more on minority equity investments or mezzanine investments in preferred shares, convertible bonds, and bonds with warrants, rather than buyouts. It is noteworthy that going private serves as an investment strategy that can be fully employed during periods of stock price declines. Given that private equity funds are designed to generate investment returns, a drop in the stock price of a publicly traded company with a high potential for value enhancement represents an attractive investment opportunity.
Need to enhance disclosure for going private deals and tender offers
In a typical going private deal in Korea, a private equity fund initially acquires a controlling stake in a listed company and then purchases the remaining shares from common shareholders through a tender offer in order to take the company private. This transaction structure, in which the private equity fund as the major shareholder is the buyer and common shareholders are the sellers, carries inherent risks of conflicts of interest and information asymmetry between the major shareholder and common shareholders. It is difficult to completely rule out the possibility that the target company’s board of directors, under the influence of the major shareholder, may prioritize the interests of the major shareholder. Furthermore, the target company or major shareholder is likely to possess more accurate and extensive information about the company’s value compared to common shareholders. However, the buyer typically has little incentive to share this information with common shareholders.
From the perspective of common shareholders, the most important consideration in deciding whether to accept a tender offer is the appropriateness of the tender offer price. The tender offer statement provides the offer price and its calculation basis, but this basis only indicates the closing stock price on the last trading day before the statement is submitted, as well as the premium rate of the tender offer price relative to the volume-weighted average prices over the past one, two, and three months. This limited information restricts investors’ ability to fully assess the fairness of the tender offer price.
If the information required to judge the appropriateness of the tender offer price is limited, common shareholders are less likely to participate in the tender offer. Given that common shareholders often take a passive position when deciding their participation, it is crucial to expand disclosures about the target company’s plans and the appropriateness of the tender offer price, potentially eliciting a positive response from common shareholders. This is a desirable approach for private equity funds aiming to improve management efficiency and realize the potential value of the target company.
Conclusion and implications
A going private transaction is, in itself, one type of value-neutral deals in the capital market. For public companies with insufficient stock liquidity and low access to capital due to limited investor interest, it can be beneficial to raise funds and pursue growth in the private market by being acquired by a private equity fund. This approach can also contribute to investor protection.
Going-private transactions have exhibited periodic changes, influenced by the interaction between market conditions and the regulatory environment. A shift in the investment landscape surrounding private equity is expected to sustain the recent growth trend of going-private deals in Korea for the foreseeable future. It should be recognized that certain going-private transactions may lead to potential conflicts of interest and information asymmetry between private equity funds and common shareholders. Based on this recognition, ways to enhance common shareholders’ access to information should be explored during the going-private process. In this respect, it is worth considering the case of the US,4) where various procedures and regulations have been established to protect common shareholders, such as disclosing the fairness opinion report prepared by independent third-party financial advisors. Moreover, the Japanese government’s Fair M&A Guideline5) could offer insights in this regard.
1) From a corporate perspective, voluntary delisting by private equity funds is typically referred to as “going private”, while from a private equity perspective, it is called “taking private”. Delisting discussed in this article refers to going-private deals based on tender offers, rather than involuntary delisting resulting from corporate insolvency, embezzlement, or breach of trust.
2) Nikkei Asia, May 25, 2024, Japan management buyouts hit record high $9.7bn in fiscal 2023.
3) Renneboog, L., Vansteenkiste, C., 2017, Leveraged buyouts: an overview of the literature, ECGI Finance Working Paper No. 492.
4) Rule 13e-3, US Securities Exchange Act.
5) Japan’s Ministry of Economy, Trade & Industry, June 28, 2019, Fair M&A Guidelines.
Recently, going-private deals1) led by private equity funds has been increasing in the US and European stock markets, as well as in Asian markets like Japan and South Korea. In the US, the private equity industry experienced two going-private waves: the first in the 1980s and the second from the 1990s to the mid-2000s. The current trend is considered the third wave, which began after the Covid-19 pandemic. In the past few years, going-private transactions in the US have surged from 28 cases worth USD 42 billion in 2016 to 45 cases worth USD 270.4 billion in 2022, before declining to 33 cases worth USD 75.5 billion in 2023 amid Fed rate hikes. Meanwhile, in Japan, going-private deals began to emerge in the mid-2000s as private equity investments in the country increased. This trend has also seen a sharp rise since the Covid-19 pandemic. In Japan, public-to-private management buyouts (MBO), which were 12 cases in 2022, climbed to 18 in 2023, reaching an all-time high in the past 13 years.2) Notably, in 2023, Toshiba, one of Japan’s leading listed companies, was removed from a stock exchange following a tender offer by a Japanese private equity consortium. In Korea, after a few going-private transactions occurred in the early 2010s, the trend has gained momentum since 2023, with several major private equity firms initiating tender offers leading to delisting. In 2023, Osstem Implant and Lutronic were delisted following tender offers led by private equity funds, and as of 2024, tender offers have been made or are underway to take publicly traded companies private such as Ssangyong C&E, LocknLock, and ConnectWave.
Motivation for going private
To identify the motives behind going-private transactions, it is necessary to understand what drives companies to go public. The primary motivation for going public is to raise capital from stock market investors. In addition, listing ensures liquidity in stock trading and provides a means of wealth diversification through on-exchange share disposal by founders and major shareholders, as well as performance-based compensation such as stock options for employees and executives. Beyond these direct motives, there are intangible benefits to being a publicly traded company, such as certification and visibility effects. Also, founders, employees and executives may feel a sense of pride from being part of a listed company. On the other hand, the most significant costs associated with going public and maintaining a listing include compliance expenses related to various listing regulations, such as disclosure requirements, the costs to manage common shareholders, and the burden on management to meet the demands and expectations of stock market investors. These factors can put pressure on management, affecting their ability to set and execute long-term strategic plans.
Evolution of private equity-backed delisting
While there are common drivers of going-private deals in foreign capital markets, they are also influenced by timing and geographic differences. The first going-private wave in the US in the 1980s occurred in the midst of a massive M&A boom characterized by hostile takeovers involving corporate restructuring of listed companies. Through the junk bond-financed leveraged buyouts (LBOs), private equity is considered to have significantly contributed to streamlining the operations of bloated public companies. While the first wave focused on large companies in mature industries, the second wave in the 2000s shifted focus to mid-sized private companies in growth industries. This shift occurred because extensive corporate restructuring took place during the first wave, reducing similar investment opportunities. Moreover, factors such as low investor recognition, lack of stock liquidity, and increased costs of maintaining a listing due to the Sarbanes-Oxley Act (SOX) led emerging or small public companies to opt for going private. During this period, the financing for corporate takeovers was primarily facilitated by low interest rates and the growth of the asset-backed securities market. Meanwhile, the third wave, starting in the late 2010s, has been spurred by a variety of factors. Similar to the second wave, it has mainly involved growth companies seeking to go private. However, additional factors such as the US-China trade dispute, the Covid-19 pandemic, stock price declines resulting from rising interest rates, and the strong presence of activist funds have also contributed to this wave. Notably, many technology companies, which went public through IPOs or SPACs during the Covid-19 period and experienced poor stock performance subsequently, have been targeted for delisting by private equity funds. In terms of acquisition financing, private debt, which has seen significant growth since the 2010s, has replaced traditional acquisition financing, providing the necessary funds for corporate acquisition.
Going private and value enhancement
Academic analyses of foreign delisting cases demonstrate that going-private deals enhance shareholder value through stock price increases or going-private premiums. For instance, the event study on going-private transactions during the first wave in the US indicates that the disclosure of tender offers for delisting resulted in cumulative abnormal returns (CAR) of approximately 20% for a 3 day period surrounding the disclosure date. It also suggests that during the second wave, stock prices increased to levels comparable to the first wave, albeit with a slight decline in CAR. In addition, the going-private premium—the difference in stock price between the final takeover share price and the pre-announcement price—was reported to be around 45% during the first wave and approximately 30% during the second wave.3)
The increase in shareholder value through going-private transactions can be attributed to several factors. One primary reason is that the private equity firm and the company’s management can focus on corporate performance and enterprise value while the company remains private. Other factors include the potential for preventing inefficient management and waste of resources through monitoring by private equity firms, the elimination of listing costs, protection from hostile takeovers, and investment returns derived by acquiring undervalued public companies (Renneboog et al., 2017). In recent going-private deals led by both domestic and foreign private equity funds, the primary drivers likely include the possibility of focusing on corporate financial performance and long-term strategy, the removal of listing costs, and investment returns from acquiring undervalued public companies.
Recent going-private transactions in Korea
Recent going-private deals by domestic private equity funds have garnered significant attention in that they have been rarely witnessed in Korea’s stock market. While investments through delisting have been active in the US since the early days of private equity, this trend has only come to the fore in Korea nearly 20 years after the introduction of private equity funds in this country. The increase in going-private transactions in Korea is driven by the continuous growth in the amount of capital raised by private equity funds and the growth of leading private equity firms. In this situation, the limited availability of private companies suitable for substantial buyouts has prompted private equity funds to pursue buyouts of publicly traded companies. As seen in foreign cases, the growth of the acquisition finance market has also played a crucial role in the increase in going-private transactions in Korea. On top of that, buyouts for listed companies have been rarely executed, opening up opportunities to enhance enterprise value through unique corporate governance improvements by private equity funds. In Korea, private equity funds investing in listed companies have typically focused more on minority equity investments or mezzanine investments in preferred shares, convertible bonds, and bonds with warrants, rather than buyouts. It is noteworthy that going private serves as an investment strategy that can be fully employed during periods of stock price declines. Given that private equity funds are designed to generate investment returns, a drop in the stock price of a publicly traded company with a high potential for value enhancement represents an attractive investment opportunity.
Need to enhance disclosure for going private deals and tender offers
In a typical going private deal in Korea, a private equity fund initially acquires a controlling stake in a listed company and then purchases the remaining shares from common shareholders through a tender offer in order to take the company private. This transaction structure, in which the private equity fund as the major shareholder is the buyer and common shareholders are the sellers, carries inherent risks of conflicts of interest and information asymmetry between the major shareholder and common shareholders. It is difficult to completely rule out the possibility that the target company’s board of directors, under the influence of the major shareholder, may prioritize the interests of the major shareholder. Furthermore, the target company or major shareholder is likely to possess more accurate and extensive information about the company’s value compared to common shareholders. However, the buyer typically has little incentive to share this information with common shareholders.
From the perspective of common shareholders, the most important consideration in deciding whether to accept a tender offer is the appropriateness of the tender offer price. The tender offer statement provides the offer price and its calculation basis, but this basis only indicates the closing stock price on the last trading day before the statement is submitted, as well as the premium rate of the tender offer price relative to the volume-weighted average prices over the past one, two, and three months. This limited information restricts investors’ ability to fully assess the fairness of the tender offer price.
If the information required to judge the appropriateness of the tender offer price is limited, common shareholders are less likely to participate in the tender offer. Given that common shareholders often take a passive position when deciding their participation, it is crucial to expand disclosures about the target company’s plans and the appropriateness of the tender offer price, potentially eliciting a positive response from common shareholders. This is a desirable approach for private equity funds aiming to improve management efficiency and realize the potential value of the target company.
Conclusion and implications
A going private transaction is, in itself, one type of value-neutral deals in the capital market. For public companies with insufficient stock liquidity and low access to capital due to limited investor interest, it can be beneficial to raise funds and pursue growth in the private market by being acquired by a private equity fund. This approach can also contribute to investor protection.
Going-private transactions have exhibited periodic changes, influenced by the interaction between market conditions and the regulatory environment. A shift in the investment landscape surrounding private equity is expected to sustain the recent growth trend of going-private deals in Korea for the foreseeable future. It should be recognized that certain going-private transactions may lead to potential conflicts of interest and information asymmetry between private equity funds and common shareholders. Based on this recognition, ways to enhance common shareholders’ access to information should be explored during the going-private process. In this respect, it is worth considering the case of the US,4) where various procedures and regulations have been established to protect common shareholders, such as disclosing the fairness opinion report prepared by independent third-party financial advisors. Moreover, the Japanese government’s Fair M&A Guideline5) could offer insights in this regard.
1) From a corporate perspective, voluntary delisting by private equity funds is typically referred to as “going private”, while from a private equity perspective, it is called “taking private”. Delisting discussed in this article refers to going-private deals based on tender offers, rather than involuntary delisting resulting from corporate insolvency, embezzlement, or breach of trust.
2) Nikkei Asia, May 25, 2024, Japan management buyouts hit record high $9.7bn in fiscal 2023.
3) Renneboog, L., Vansteenkiste, C., 2017, Leveraged buyouts: an overview of the literature, ECGI Finance Working Paper No. 492.
4) Rule 13e-3, US Securities Exchange Act.
5) Japan’s Ministry of Economy, Trade & Industry, June 28, 2019, Fair M&A Guidelines.