Understanding Public vs. Private M&A Deals

Inspite of innumerable differences, the final goal of any acquisition whether public and private M&A is largely the same to generate value for the acquirer. But the extracting of value from public and private M&A is achieved quite differently.

What is Public M&A?

In public M&A, the buyer is acquiring a company which is already publicly listed and whose stock is already on a being publicly traded in the equity market.

While in a private M&A, it involves companies that are private and not publicly traded on any stock market index, and have very few disclosure requirements.

The key differences of a Public vs Private M&A:

There are many important differences between public and private M&A transactions.These include the following:

• Ownership: The ownership of public companies is distributed across several thousand (and sometimes million) shareholders, since they are publicly traded over the stock index. By contrast, private companies tend to be held by a much smaller group of owners, usually it’s a family enterprise, partnership or owned by a private equity fund. 
• Management: Management teams at public companies tend have more corporate and professional experience. For example, more than half of CEOs have some finance or accounting experience. While in the case of private companies, not only are the management teams be smaller, but it is possible that they’ve been promoted to their position because they are family members or have family connections.
• Disclosure of Information: Most public companies are obliged to meet information obligations – ranging from quarterly audited financial statements to disclosures on all material matters, so getting information about public companies is much easier to obtain. Private companies, as the name suggests, are far less forthcoming with this information.
• Financial Transparency: A buyer of a public company can expect more clarity and transparency in their financial statements. With private companies, by contrast, the relative lack of oversight (with the exception of tax authorities) means different ‘conventions’ are common (cash accounting, to take just one example).
• Valuation: Public companies come with a ready-made valuation – the publicly quoted price for the company. Private companies have no such ready-made valuations. Moreover there are also other issues, such as their lack of liquidity, to account for.

The Characteristics of a Public M&A

The following are the characteristics of Public M&A transactions:

• Information disclosure.
• Less founder presence.
• Longer time period is required to gain consensus, as they have to take shareholder approval for material decisions such as M&A.
• More straightforward deal structures with combinations of debt and equity used to reach the target company valuation.
• The seller faces far less responsibility for issues that arise after closing – public M&A tends to be viewed from the standpoint of ‘buyer beware’.

The Characteristics of Private M&A:

Public M&A transactions tend to be characterized by the following:

• Lack of information disclosure.
• More founder presence.
• Less time required to gain consensus, with only approval from senior management required for the transaction to close.
• Deal structures can become quite complex with private M&A and regularly include some form of earn-out structure. Asset purchases are also common.
• The seller can be held financially responsible by the buyer for material omissions during or before the transaction closes (for example, a pending lawsuit that wasn’t mentioned).

Strategy & Goals of Public vs. Private M&A:

From a transaction standpoint, the goal behind every transaction is the same: to acquire the company while generating as much value as possible.

This means the least valuation possible, thorough due diligence, and through well-planned post-merger integration.

There are some differences for each in both cases:

Valuation: The price paid for the target company is one of the key success drivers of any transaction. In the case of public M&A, shareholders will vote on the deal. Companies should avoid being dragged into a bidding war. If the target company voters aren’t interested in selling, it’s usually good to take this as a sign to leave the deal.

• Due Diligence: Although due diligence is important in both public and private M&A, it’s undoubtedly more of a challenge in the merger and acquisition of a private company. Private companies avoid the SEC’s spotlight and may have any number of quirks in their financials, operations, and legal documents.
• Post Merger Integration :PMI is equally important in public and private M&A. But the business culture tends to be far better defined in public companies. Private companies may be more easily molded by the acquirer’s culture but it tends to be more of a challenge in public M&A.

When a Private Company Acquires a Public Company

Sometimes a private company may acquire a public company, not just to add value, but to go public itself.This is known as a reverse takeover, a reverse merger, or a reverse IPO. An IPO in the sense that the company is going public for the first time. This is an increasingly popular form of transaction whereby the buyer purchases the target company (a public company), and then becomes a ‘shell’, with only its organizational structure remaining.The shares of the company are redistributed among the shareholders as per the terms agreed in the acquisition.The best-known reverse merger of all times was that of Berkshire Hathaway, the publicly listed holding company of Warren Buffett. He liquidated the textile company in 1985, and merged all of his other assets into the publicly listed Berkshire Hathaway, to become one of the world’s largest companies by market capitalization.