PUBLIC-TO-PRIVATE TRANSACTIONS, A CROSS COUNTRY COMPARISON

Undergraduate

ABSTRACT


We analyze the pre-transaction characteristics of firms going private in the UK, France, Germany and the Nordic region from 2002-2006. We find that a firm’s propensity to go private is an increasing function of leverage, ownership and control, undervaluation and cash flows. A previously suggested explanation for the higher leverage in firms going private is the expropriation of pre-transaction debt holders. The theory is however rejected in this paper, as we find no sign of losses for these debt-holders. Additionally, we study if the incentives to go private vary across countries, depending on market conditions, taxes and corporate governance. Support is found for that, on a country level, a higher degree of corporate governance, and in turn efficiency of the takeover-market, increase the probability of going private.



INTRODUCTION

The most common type of large-scale companies are investor held, of which many are traded in the public markets (Hansmann 1996). A stock exchange listing allows firms to raise funds in public capital markets, increase the share liquidity for investors and founders and entrepreneurs to diversify their wealth. Another key advantage is the ability to use stock incentive plans to attract and retain employees. This is however not the only type of firm, and not always the best. During the last 25 years the act of acquiring and taking a listed company private through a Public-to-Private (P2P) transaction has become increasingly important. Central questions to answer are why this phenomenon has become so important and if it is of equal significance around the world. Not many studies have examined this phenomenon, but three recent and relevant papers have however been written on the topic. Renneboog and Simons (2005) present the recent developments and historic waves of the going private market as well as investigates the motives for P2P and Leverage Buy Out (LBO) transactions through literature studies, for the United States (US), the United Kingdom (UK) and Continental Europe. Another study related to the topic, which investigates the decision to go public by testing why firms go private is made by Bharath and Dittmar (2006). The study is made on P2P transactions in the US from 1980-2004. The third recent study, by Thompsen and Vinten (2006), investigates delisting from European Stock Exchanges 1995-2005, with particular focus on corporate governance on a country level. 

We add to the study by Renneboog and Simmons by performing a statistical investigation, rather than a literature study, on the P2P topic for the UK and Continental Europe (France and Germany). We further expand the results by Bharath and Dittmar for the US by performing a similar study in Europe. To these two studies we also add a cross country dimension. The reason for this comparison is that there may be different incentives for companies to go private across different regions, depending on market conditions, taxes and corporate governance. Finally, we add to the study by Thomsen and Vinten by looking at firm level evidence. 

BACKGROUND

The decision to go public was considered a natural step in a firm’s growth process until the 1980’s when the US experienced a major wave of going private transactions amongst large and mature firms. This resulted in that the US share of the world market capitalization shrunk from 53.3% to 29.9% (Zingales 1995). Many questions arose regarding this phenomenon, such as whether this was a temporary phenomenon or if going private transactions would become an important transaction type in the financial sectors. Kaplan (1991) studied what happened after firms went private and found that around 50% of large LBOs became public again within 7 years and that 7% of these went private again later on. Hence, he concluded that “taking firms private is neither shortlived, nor permanent”. 

The number of P2P transactions within Europe has steadily increased since the 1980’s. Looking at deal value, it is evident that the importance of the P2P transactions has grown at a much faster pace since 1995 and reached an all time high in 2005. The value in 2005, $170 billion, was actually more than twice the value in 2000. This makes understanding the reasoning behind this transaction type very relevant today.