Going Private Transactions Research Articles

Does Increased Visibility to the IRS Cause Public Firms to Go Private? Evidence from FIN 48

This study investigates whether the introduction of a mandatory disclosure requirement (FIN 48), which had the effect of increasing public firms’ visibility to the tax authority, incentivized going-private transactions. Building on analytical work suggesting that disclosures required under FIN 48 act as a signal to the government regarding the uncertainty of the taxpayer’s position (Mills, Robinson, and Sansing 2010), I hypothesize and find evidence of an increased propensity to go private among aggressive tax planning firms following the enactment of the new disclosure rule but prior to its adoption. The effect is concentrated in firms with high CEO ownership, consistent with CEOs of tax aggressive firms viewing the mandated disclosures as damaging to the firm’s prospects and seeking to escape the anticipated effects to their personal wealth. Furthermore, I find that the spike in going-private transactions among tax aggressive firms is driven primarily by private equity-led buyouts. Overall, my findings suggest that mandatory disclosures giving rise to increased visibility to the tax authority may have the unintended consequence of discouraging some firms from operating as public entities.

Can Stock Liquidity be Transferred and Upgraded in Acquisitions? Option-Adjusted Evidence from Liquidity Synergies in US Freeze-Outs

This paper investigates the value successful bidders generate from acquiring less liquid targets. This synergy is traced with both theoretical and empirical evidence from the squeeze-out stage of going private transactions, when bidders hold sizeable toeholds in target shares. On one side, via liquidity transferring, acquirers can effectively transfer their thinner liquidity discount on the valuation of their toeholds in fully acquired target assets. On the other, their long-run stock liquidity can improve following the removal of their targets from the exchange. Using a sample of US delisted targets from globally listed acquirers during the last 25 years and in line with our theoretical analysis a nonlinear relation is evidenced between the expected added value from liquidity transfer and illiquidity differences. After adjusting target market prices for the attached option to participate in the bid in a stochastic volatility framework, acquirers with higher liquidity differences from their targets are revealed to capture a disproportional share of the deal-generated economic rents for two reasons. First, because bidder negative abnormal returns are mitigated for deals promising a higher value of liquidity transfer and, second, due to a witnessed improvement in acquirer stock liquidity subsequent to the full acquisition of its target, which is more intensive for stock offers.

Do Going-Private Transactions Affect Plant Efficiency and Investment?

We examine whether constraints on public firms affect firms' efficiency by testing if going private improves plant-level productivity relative to peer control groups. We find that, despite increases in productivity after going private, there is little evidence of efficiency gains relative to peer groups of plants constructed to control for industry, age, size, past productivity, and the endogeneity of the going-private decision. Going-private firms do extensively restructure their portfolio of plants, selling and closing plants more quickly than others. Our findings cast doubt on the view that public markets cause listed firms to operate plants less efficiently due to overinvestment but indicate that going private increases restructuring activity.

The sources of shareholder wealth gains from going private transactions: The role of controlling shareholders

The present study investigates the sources of shareholder wealth gains – as measured by cumulative abnormal returns and premiums – from going private transactions (GPTs). Using data for 314 GPTs from 18 Western European countries, we find that the announcements of GPTs generate a cumulative average abnormal return of about 22% and that pre-transaction shareholders on average receive a raw premium of about 36%. We further find that these shareholder wealth gains increase with the degree of separation of cash-flow and control rights of the pre-transaction ultimate owner and decrease with its ownership interests and with the presence of a second large shareholder. Taken together, these findings support the view that GPTs are expected to mitigate the inefficiencies induced by pre-transaction agency problems between controlling and minority shareholders. Thus, shareholder wealth gains from GPTs reflect the potential additional value that will be created under private ownership.

Going private transactions by U.S.-Listed Chinese companies: What drives the premiums paid?

This paper examines the premiums paid by U.S.-listed Chinese companies in going-private transactions over the period from 2010 to 2012 and tests several incentive hypotheses for taking public companies private. Apart from the factors representing perceived difficulties and potential litigation risks in buying back shares, and corporate governance and agency issues, we focus our attention on the undervaluation of share prices and the amount of cash holdings of the sample firms. The latter two factors turn out to be the primary drivers of the premiums paid. Our empirical evidence strongly suggests that the current phase of going-private transactions by U.S.-listed Chinese firms is most likely to be linked to arbitrage considerations, i.e., to arbitrage the undervalued share prices and the cash holdings available to the acquirers.

Tunneling and the decision to go private: Evidence from Hong Kong

We examine a sample of going-private transactions in the Hong Kong stock market from 1989 to 2008. Privatized firms experienced large negative abnormal returns prior to the announcement of going private transaction, particularly in those firms with weak corporate governance structure and a high level of related party transactions. The likelihood of a firm to go private is high in those poorly governed firms with large free cash flow. Our evidence suggests that controlling shareholders carry out self-dealings that lead to value losses and depressed stock prices. When remaining public is no longer attractive, controlling shareholders take the firm private by paying a relatively low premium to minority shareholders.

The delisting decision: The case of buyout offer with squeeze-out (BOSO)

In this paper, we exploit the specificity of going-private transactions that are initiated by the historic controlling shareholders (i.e. voluntary delistings). In Continental Europe, the majority of firms that become private do so following a buyout offer with squeeze-out (BOSO); using this mechanism, the controlling shareholder can cash out minorities and take the firm private. We argue that the decision to go private results from a cost–benefit analysis. Moreover, we pay particular attention to the consequences and the related costs of compliance resulting from the passage of the French Financial Security Law (FSL) in 2003. A quantitative study was performed using a unique dataset spanning 1997–2006. This data set consists of 140 French firms, of which 70 were voluntarily delisted via BOSO and 70 were industry-matched control firms. Univariate analysis and logistic regressions support the cost–benefit analysis: when listing benefits decrease because of weak liquidity and/or weak analyst coverage, it seems better for the firm to go private. Furthermore, the inherent characteristics of delisted firms (i.e. performance, leverage, and risk as measured by the beta factor) appear to be important driving factors of delisting. The passage of the FSL has strengthened the impact of these characteristics on the decision to go private. Mature firms that have weak performance and low specific risk and that are not financially constrained by debt will decide to go private because they cannot afford the listing status anymore. Finally, we show that the driving factors of delisting differ according to the identity of the controlling shareholder; specifically, the level of risk appears to be the strongest determinant for family firms, while non-family firms also consider their own financial structure.

The Sources of Shareholders’ Wealth Gains in French Going-Private Transactions: The Role of the Largest Controlling Shareholders

The Sources of Shareholders’ Wealth Gains in French Going-Private Transactions: The Role of the Largest Controlling Shareholders

The Delisting Decision: The Case of Buyout Offers with Squeeze-Out (BOSO)

In this paper, we exploit the specificity of going-private transactions that are initiated by the historical controlling shareholders (i.e., voluntary delistings). In Continental Europe, the majority of firms that become private do so following a buyout offer with squeeze-out (BOSO); using this mechanism, the controlling shareholder can cash out minorities and take the firm private. We argue that the decision to go private results from a cost-benefit analysis. Moreover, we pay particular attention to the consequences and the related costs of compliance resulting from the passage of the French Financial Security Law (FSL) in 2003. A quantitative study was performed using a unique dataset spanning 1997-2006. This data set consists of 140 French firms, of which 70 were voluntarily delisted via BOSO and 70 were business-matched control firms. Univariate analysis and logistic regressions support the cost-benefit analysis: when listing benefits decrease because of weak liquidity and/or weak analyst coverage, it seems better for the firm to go private. Furthermore, the inherent characteristics of delisted firms (i.e., performance, leverage, and idiosyncratic risk as measured by the beta factor) appear to be important driving factors of delisting. The passage of the FSL has strengthened the impact of these characteristics on the decision to go private. Mature firms that have weak performance and low specific risk and that are not financially constrained by debt will decide to go private because they cannot afford the listing status anymore. Finally, we show that the driving factors of delisting differ according to the nature of the controlling shareholder; specifically, the level of idiosyncratic risk appears to be the strongest determinant for family firms, while non-family firms also consider their own financial structure.

Introduction to Special Issue of JREFE on REITs

This paper is an introduction to a special issue of the Journal of Real Estate Finance and Economics (JREFE) devoted to papers on Real Estate Investment Trusts (REITs). The papers were especially written for a conference sponsored by the National Association of Real Estate Investment Trusts. The papers deal with the theoretical and empirical aspects of REIT underwriting behavior, corporate governance, asset pricing, takeovers and going-private transactions, capital-market based financing, changes in monetary policy and changes in REIT stock prices, and risk-bearing and liquidity.

Disclosure policy: A discussion of Leuz, Triantis and Wang (2008) on “going dark”

LTW (2008) examine firms withdrawing from the SEC reporting system but continuing to trade on Pink Sheets. The paper finds that Sarbanes-Oxley increased the propensity of firms to go dark but, counter to conventional wisdom, had no significant effect on the rate of going-private transactions. Agency costs, as well as poor growth opportunities, proximity to financial distress, and increased compliance costs arising from SOX increase the propensity to go dark. Suggestions to improve the empirical implementation and interpretation involve including additional control and more suitable explanatory variables, and more attention to causation issues and to the quantification of economic significance.

The Sarbanes–Oxley Act and firms’ going-private decisions

We investigate going-private decisions in response to the passage of the Sarbanes–Oxley Act of 2002 (SOX). We study firms that go private from 1998 to May 2005 and find: (1) the quarterly frequency of going-private transactions has increased after the passage of SOX, and (2) abnormal returns surrounding both the passage of SOX and the going-private announcement are significantly related to proxies for the costs and benefits of SOX and the net benefits of being a public firm. Our empirical evidence is broadly consistent with the notion that SOX has affected firms’ going-private decisions.

Changing Times? Going from Public to Private: Evidence from the U.S. Restaurant Industry

ABSTRACT In recent years, there has been dissent among executives of publicly-traded restaurant companies because of regulations imposed by the Sarbanes-Oxley Act of 2002. Executives believe that capital markets seem to undervalue restaurant firms. Mergerstat reports on “going-private transactions” have risen steadily. The motivation of this paper is to report the effect of “going private” announcements on the shareholders' wealth of the target restaurant firms. A total of 19 publicly traded restaurant firms that made “going private announcement” in the 1995-2004 period were included in this study. Event study analysis was used to determine whether there is an “abnormal” stock price effect associated with “going private” announcements within the restaurant industry. Event study guidelines suggested by MacKinlay (1997) were used. Research findings indicate that on the day of the announcement (t,0) shareholders of restaurant firms that were to be taken private enjoyed a highly positive abnormal return of 16...

A Brief Roadmap to Going Private

In the midst of increasing regulatory burdens and a shaken economy that is slow to recover, more and more U.S. companies are choosing to forego their public status through “going private” transactions. “Through the end of August, sixty public companies had already [gone] private in 2003, . . . up from forty-nine during the same period in 2002 and thirty-two in 2001.” The number of companies going private in the sixteen-month period following the passage of the Sarbanes-Oxley Act numbered 120, 30% more than in the sixteen-month period prior to its July 30, 2002 enactment. Experts expect that with the sluggish economic recovery and increased regulatory compliance costs, the going private trend will continue to pick up speed. The purpose of this paper is to offer the reader a basic roadmap to going private, introducing and bridging the major considerations involved in the typical going private transaction. Part Two provides an overview of going private, beginning by defining “going private” and highlighting the major reasons companies go private, including the effective closure of capital markets, avoidance of regulatory expenses, long-term value maximization, and decreasing agency costs. It continues by pointing out current sources of these reasons, such as market downturns and the passage of the Sarbanes-Oxley Act, which combine to make an environment highly favorable to going private transactions. The section then presents barriers that may prevent a company considering going private from making the move and introduces the key players in a going private transaction. Part Two closes by analyzing the popular means by which to finance a going private transaction and the current climate in which such financing may be procured. Part Three presents the legal considerations that come into play when a company chooses to go private, including federal disclosure rules and state compliance laws. These considerations may affect both the choice of whether to take a company private and the optimal transaction structure chosen once such a decision has been made. The section begins by examining Rule 13e-3, the federal disclosure standard that governs going private transactions, describing its mechanics and disclosure requirements. Relevant state law issues are then introduced, with particular attention being given to legally enforceable standards of review, including the well-known “entire-fairness” test. Finally, Part Four details the possible means of structuring the going private transaction, which include the long-form merger, the tender offer, the reverse stock split, and the asset sale and dissolution. Advantages and disadvantages of each structure are compared, and reflect timing, financing, tax, and legal considerations, including recent Delaware case law that makes the tender offer the transaction of choice for controlling shareholders taking a company private.

Governing Insiders Going Private on Inside Information

Going private transactions represent a unique niche in corporate law; they are distinct in that “the arms-length bargaining that is present in the majority of inter-corporate transactions is absent,” and thus they raise special concern regarding conflicts of interest. This creates a situation ripe for misconduct, and must be specifically addressed. A number of doctrines can be applied to such transactions, including some that were developed in other contexts. For example, the doctrines of fiduciary duty, corporate opportunity and insider trading govern insiders’ conduct generally. In addition to these broader doctrines, Federal securities regulations addressed this going private conflict of interest with the promulgation of Rule 13e-3, the only doctrine developed specifically to police going private. This paper examines the application of these different doctrines to a particular type of going private conflict: the challenge insiders of a corporation face when choosing to take a corporation private on the basis of inside information. This topic is particularly relevant today because of the recent increase in going private transactions. This increase can be attributed in part to depressed stock prices (as a result of the recent market decline) that made it cheaper to buy out stockholders, and to heightened corporate regulation in the wake of recent corporate scandals, particularly in the form of Sarbanes-Oxley, which has increased the costs for companies to remain public.

The Efficiency of Takeovers

The market for corporate control that has arisen in the last two decades is generating large benefits for shareholders and for the economy as a whole. The corporate control market generates these gains by loosening the control over vast amounts of resources and making it possible for those resources to move more quickly to their highest-valued use. This occurs through takeovers (both hostile and friendly), divestitures, spin-offs, split-ups, leveraged buyouts, and going-private transactions. We are seeing a normal healthy market in operation, both on the takeover side and on the divestiture side. The total benefits have been huge as reflected in gains of $40 billion to stockholders of acquiring firms in 260 tender offers alone in the last four and a half years (as estimated by the office of the chief economist of the SEC). The market for corporate control is best viewed as a major component of the managerial labor market. It is the arena in which alternative management teams compete for the rights to manage corporate resources. Understanding this is crucial to understanding much of the rhetoric that takes place about the effects of hostile takeovers. Managers formerly protected from competition for their jobs by antitrust constraints that prevented takeover of the nation's largest corporations are now facing a much more demanding environment and a more uncertain future. It is not surprising that many of them would like relief from this competition.

Augmenting the Duties of Directors to Protect Minority Shareholders in the Context of Going-Private Transactions: The Case for Obligating Directors to Express a Valuation Opinion in Unilateral Tender Offers After Siliconix, Aquila and Pure Resources

This article addresses the threat posed by unilateral tender offers initiated by controlling shareholders. First, the article will examine why it is particularly compelling today for majority shareholders to acquire the remaining stock in the public companies they control. Second, the article will address the process for taking a company private and the various deal structures that can be employed. Third, the article will review the standard of conduct governing directors in various related-party transactions. Fourth, the article will discuss both recent Delaware judicial decisions making it easier for directors to sit on the sidelines while controlling shareholders use the inherently coercive tender offer process to force minority shareholders into accepting below-value offers for their shares, and recent Delaware case law rejecting this trend. Finally, the article concludes by proposing significant changes to the rules governing directorial duties to minority shareholders in the context of controlling-shareholder initiated unilateral tender offers.

Eclipse of the Public Corporation

The publicly held corporation has outlived its usefulness in many sectors of the economy. New organizations are emerging. Takeovers, leveraged buyouts, and other going-private transactions are manifestations of this change. A central source of waste in the public corporation is the conflict between owners and managers over free cash flow. This conflict helps explain the prominent role of debt in the new organizations. The new organizations' resolution of the conflict explains how they can motivate people and manage resources more effectively than public corporations. (HBR McKinsey Award Winner)

Insider Ownership and the Decision to Go Public

This paper focuses on the role of an initial offering (IPO) in maximizing the proceeds an initial owner obtains in selling his company. In deciding whether to undertake an IPO, and what fraction of ownership to retain, the initial owner must balance two factors. By selling to dispersed shareholders, he maximizes his proceeds from the sale of cash flow rights. However, by directly bargaining with a potential buyer, he maximizes his proceeds from the sale of control rights. Whether a company should be private or public, as well as the insider's ownership in companies, depends on the particular combination of majority control and dispersed ownership which maximizes the incumbent's wealth. The model provides implications on the strategy to be followed in selling a company as well as on the timing of IPOs and going-private transactions. The initial offering (IPO) is frequently the largest equity issue a corporation ever makes. Every year an average of one-third of all the funds raised through common equity is raised through IPOs. The IPO is also an important channel through which an entrepreneur or venture capitalist gets rewarded for his initial effort. Our understanding of the process of public is critical to any attempt both to increase equity financing and to stimulate entrepreneurial and venture capitalist activities. The latter has been stated as an objective in the policy debate over the capital gains tax (see Poterba (1989)). Until the beginning of the 1980's the decision to go was considered a simple stage in the growth process of a corporation. This interpretation can no longer hold. In the 1980's the U.S. experienced a major wave of large and mature firms going private. The result was that, despite a growing economy and a long bull market, in the 1980's the U.S. share in world market capitalization shrank from 53.3% to 29.9%. Very little is known about why companies choose to revert back to private ownership and whether this is a temporary or a permanent situation. According to Kaplan (1991) these neo-private companies are neither short lived nor permanent. He estimates that only 50% of large leveraged buyouts (LBO) become again within seven years after the LBO transaction. Furthermore, 7% of those companies in his sample that returned to offering went private again later. Starting with Pagano (1993), existing models emphasize some aspects of the traditional trade-off between the costs and benefits of going public.' On the cost side, there are the registration and underwriting costs (on average 14% of the funds raised, according to Ritter (1987)), the underpricing cost (on average 15%, Ritter (1987)), the annual disclosure costs, and the agency problems generated by a separation between ownership and control (Jensen and Meckling (1976)). On the benefit side, there are diversification, the possibility of equity financing beyond the initial entrepreneur's limited wealth, a less costly access to

Highly leveraged transactions and managerial discretion over investment policy: An overview

These discussion comments place the evidence by Denis and Denis on leveraged recapitalizations in the broader context of highly leveraged transactions, including going-private transactions, management buyouts, and so-called reverse LBOs. The evidence indicates that highly levered companies that remain publicly-owned experience improvements in operating performance and reductions in capital expenditures following the leverage boost comparable to those of companies that have gone private. Despite increases in operating income, however, the obligations of the additional debt taken on are sufficient to preclude management from internally financing capital expenditures at previous levels. There is evidence consistent with the claim that this limitation benefits stockholders.