What are some of the challenges that boards face when they find themselves the target of a private equity bid?
Target directors can find bids from private equity very challenging for a number of reasons. Bids commonly flow where there are funding issues. Private equity bids brings a commitment to future business funding, and in some respects that is what directors should be able to organise for a company.
Boards must advise shareholders – is the price that private equity is prepared to pay fair and reasonable and in the company’s best interest and one that they would then recommend to shareholders? The difficult thing for a listed board is for it to say ‘I think the PE Fund can do a better job with the company in a private environment than we can do for you in a listed environment.’
Another challenge for target boards relates to timing: should they open up their books to the bidder, and when should they tell the market? At what point is a bid sufficiently certain that they should tell the market, and will that affect the price of the bid?
How should target boards approach making this decision?
A board that feels that it is ‘ripe for a bid’ should anticipate and prepare. It needs to have three things in mind:
A board should have a value that is indicative of what they consider to be a fair and reasonable outcome for the company and its shareholders at the time.
A board should have a strategy in mind to respond to a bid.
- Alternative bidder
A board should also have a counter bidder in mind – preferably a strategic bidder – that will in all likelihood be willing to pay more because it can realise more value for their existing business as well as the one they are thinking of buying.
How does a private equity-backed board run differently to a listed board?
Governance is an art and it applies to any company, private equity owned or not – so it is still important. But a private equity-backed board doesn’t need to spend as much time as a listed board, for example, on continuous disclosure and what shareholders will think, because they are already sitting at the board table with you. I think that private equity boards have the luxury to spend more time on the underlying business, and on the people side.
Personally, I think independent directors often add value to a private equity-backed board. They bring a breadth of experience both from their working life and from their other directorships. They bring a different view point, and can often look beyond the weeds in a way that management cannot However, the owners of the business have to want an independent perspective. Independent boards should not be foist on a PE owner.
Private equity owned companies have a reputation focusing on the short-term. How do you think they can reconcile the short-term with the long-term view?
I would say that a private equity owned company’s focus is not necessarily on the short-term, but rather, the exit. And the exit comes from selling to someone else. For this to happen, you need a sustainable business model and good governance instilled in the company, so that the when the business is sold there is profitability and proper outlook, with sound disclosure.
This raises an interesting question about the timeframe of a private equity owned company. It is said that private equity would typically look for an exit in three to five years. In this market right now a five-year business plan is looking like a long-term one.