Looking at Public Companies Going Private

The phenomenon of going private has been widely established as a corporate restructuring tool. Traditionally public companies not performing well have been resorting to this and in the past few years we have seen the booms of public to private (PTP) transactions. The Jensen himself in 1989 predicted in his famous paper of soon eclipse of public corporation.

This prediction along with others were made due to evident increased number of inefficiencies in the forms of unaccountability of management resulting in substantive losses for shareholders ,which were in turn diminishing the corporate value for shareholder; the ultimate goal of corporation. As a result we have observed a large number of public to private transactions in recent years. And as per estimates in the studies of Olper and Titman in 1993 the volume of such transactions increased to the amount of 250 Billion USD. In recent past years, the going private market has seen a considerable boom in size and also has become more interesting for private equity investors. This higher involvement of private equity investors affects considerably the going private market as these investors approach firms with different characteristics relative to the traditional management buy-outs. In recent years in US, after a period of low activity in the beginning of the 1990s, the public-to-private market experienced a steep rise in activity as of 1997 with a total value of $65 billion over the period 1997-2002 (Renneboog and Simons, 2005). These days lots of companies are significantly going private because the reality of being public has fallen far short of the predictable benefits. With falling market values, structural changes happening in the trading markets, inadequate liquidity and volume, many companies simply have been unable to realize the promise of being public and instead are burdened by their public status. In past we have certain studies on the topic but most of them have been limited to the US and UK. We rarely see studies on European sample. This collection of essays is a first endeavor in this direction where one can analyze the whole value chain and cycle of going private. I commenced with examining into the heterogeneity of reasons behind going private and interestingly it was found that reasons of going private vary on the basis of their backing.

The research was focused on two types of PTPs i,e Management backed deals Private Equity (PE) backed deals. On the basis of Literature certain hypothesis were framed and were tested with the help of Multinomial Logistic Regression. The hypotheses tested include heterogeneity in free cash flows, Undervaluation, visibility and pre buyout ownership structure. I found that the reasons sharply differ on the basis of their backing by either of two above mentioned. In the second essay the focus was on the performance of firms ex post transaction. It was crucial study in a sense that it lent credence to the phenomenon of going private as a viable corporate restructuring tool for public firms not performing well.

Their ex post performance was measured to see if these firm have gain some value after going private. Due to absence of market data, we had to resort to the use of accounting indicators. Several ratios were used for this purpose. These companies performance was controlled with their peer companies who have identical properties but they remain public.

These firms were selected by using the propensity score methodology. The hypothesis of increased performance by companies that have undergone private was substantially proved and it was found that these companies have been performing well on the level of different accounting indicators. In the third and final essay the challenge was to asses these companies on their non financial performance. Their corresponding innovation level was measured as well the application of different modern management techniques was assessed. This was done via some established instruments of Learning Organization and innovation performance. These tools helped us to open a new horizon of research. It is a premier study where PTP companies are assessed on these levels of learning organization and innovation performance. This study provided and established further credence of public to private transactions as an effective corporate restructuring tool. In the following lines each of the essay is described separately in detail.

Essay I

In the recent past, we have seen several attempts in different empirical papers which have examined these reasons that why these publicly listed firms do decide to go private (see Maupin et al., 1984; Lehn and Poulsen, 1989; Denis, 1992;Opler and Titman, 1993; Halpern et al., 1999 for US evidence and Weir et al.,2004,2005 for the UK). Therefore in our first Essay we examined the heterogeneity in the reasons behind going private on the basis of their backing up. Venture capitalists/private equity investors are often looking to partner with management when financing a going private transaction where the company is taken off the stock market. This project examines which European companies are taken private with the help of private equity investors and how the characteristics and the performance of these companies differ after going private differ from companies that are taken private without the backing of a private equity investor during these years. I am hopeful that this study will suggest that private equity backed deals differ from management backed deals without any backing of private equity investors in four ways. My hypothesis is that, firstly, Jensen’s free cash flow hypothesis seems not to quite apply to the private equity backed deals as these have cash shortage and thus pay high dividends. Secondly, they also differ on the basis of undervaluation.

Thirdly, they also differ on the basis of visibility; while fourthly, the two types of deals differ in ownership structure. Private equity backed deals are likely to consist of higher ownership by financial institutions therefore their ownership is less concentrated. I used Multinomial Logistic regression to on a sample of European firms going private transactions completed in the period 2003-2007. This research endeavors to peep into the reasons behind firms going private based on their belonging to different groups. And it was suggested and has been found that these transactions differ strongly on the basis of their membership to certain type of deal. For instance the reasons behind companies going private backed by management are widely differ than those supported by private equity houses. Even if these two transaction groups have same reason the intensity of the factor still remains highly different. This research Endeavour’s to peep into the reasons behind firms going private based on their belonging to different groups.

And it was suggested and has been found that these transactions differ strongly on the basis of their membership to certain type of deal. For instance the reasons behind companies going private backed by management are widely differ than those supported by private equity houses.

Even if these two transaction groups have same reason the intensity of the factor still remains highly different. The data was collected on the continental Europe transactions happened in recent past. Although the sample was not widely represented being it drawn not fully on random basis from the corresponding groups. Yet the results drawn are quite generalizable and in line with recent researches being taken place in the recent history. The availability of data was one of the major issue yet it was made available to represent as maximum as the target population. The analysis of the data and results show that, chances of firm going private and being backed by management or private equity houses is purely based on the insider characteristics of the firm. I have drawn several conjectures and hypothesis ranging from visibility, cash flow hypothesis, undervaluation and pre buyout ownership structure for going private transactions backed by management. Whereas the reasons for deals backed by private equity houses sharply differ as a matter of fact these private equity houses have more easy access to funds and are more strategically sound as compared to management backed deals.

These private equity backed deals therefore do not have the same factors behind their transactions as management backed deals. One of the main contributions of this study is to verify and prove the heterogeneity in the population of going private transactions in Europe and hence proved that the motives behind each going private transaction there are varying underlying motives which in turn differentiate them from the other existing population and helps them finding right group to belong. Therefore, the reasons of quitting the share market for both main underlying groups are different in its origin. Whereas the management backed deals are statistically significantly lowly visible, more undervalued, higher cash levels, higher level of debt, less analysts following, higher ownership concentration and high tax paying. The private equity deals are in total contrast to them in most cases being higher financial institution ownership, higher executive stakes with cash shortage and higher dividend payout ratio. Moreover Jensen cash rich hypothesis is more diligently followed by management backed deals being illiquid and significantly undervalued. Therefore the agency costs for remaining publicly listed grow higher hence pushing them towards going private transactions mostly backed by management themselves. Whereas on contrast to it in the case of private equity backed deals the agency costs are not yet high rather its more beneficial to remain listed as they are relatively lesser undervalued, with more liquidity and visibility but yet they are facing cash shortage. The future research may be aimed and focus on post transactions increases in firm value which may determine the efficacy and effectiveness of these transactions and this phenomenon. There is also a need to further test my results in different sample of firms which may be help in further genelaralizability of these kinds of conclusions.

Essay II

In previous paper, the reasons have been established for this increased number of transactions. However there is a need to know that weather these transactions have help increasing value for shareholders or not. In classic scenario of literature, public limited company was always preferred due to lot of reasons. These reasons included separation of management and control, listing at capital markets like stock exchanges, more effective managerial control through specialization, wealth and risk diversification etc. While, the second paper investigates the ex post performances of the firms that, have undergone the public to private (PTP) transaction during the period of 1997-2004. Their ex post performance is calculated through the accounting indicators of the firm’s operating performance. In order to benchmark their performance, we used the propensity score methodology. It was particularly supportive in finding a appropriate non buyout matching pair of firms.

After this, we performed Multivariate regression (using Heckman technique) and logit regression. Our sets of results were established by the point estimation using Heckman two stage penal techniques. In this study it has been found that the ex post value of the firms has increased evidently via increased growth in sales and higher EBITDA margin as compared to their matched controlling firms. The evidence proved the same for the initial two years post transaction. It was interesting to found out this outcome is generalizable and not limited to any particular set of firms as well as any particular industry, country or sector. Furthermore, it has been noticed that this increased performance can be accredited to the better EBITDA earning margins, increased gross margins, and relatively lower labor charges. The targets of improved growth and better performance have been achieved through superior and improved utilization of working capital.

This study hopes to help establishing the fact that public to private transactions do help increasing the ex post firm value.

Third Essay:

In the pastA thereA have been a number of studies on theA impact ofA public-to-private (PTP) transactions, but they remained mostly related to the financial grounds. Their focus has beenA primarilyA on theirA financialA performanceA and the new corporate frameworks (see Cumming, D., Siegel, D., Wright M. (2007). While the questions related to the technological change, innovation, modern management practices after theA buyoutsA are still needed to be answered. These questions have not yet received much attention of researchers.

Moreover, we still face the lack ofA informationA on thisA stimulusA or technological or the expected organizational change in theA postA transactionA period Though the boom of these PTP transactions is nowA largelyA over, but the debate continues. The debate encompasses from the reasons behind these transactions along the competitiveness and results of these transactions.A Some ofA ResearchersA have argued the higherA debtA associated with aA buyoutA does forces the firms to cut down the much-needed capital and R&D investments for the sake of debt servicing.A This mayA impairA theirA productivityA and competitiveness in the long run (see Reich, 1989). While some other researchers have taken theA reasonsA basing on the agencyA beliefA that going private help those to increase theirA efficiencyA (see Jensen, 1986, 1988).A ThereA areA a number of ex-anteA eventA studies on these buyouts, which onlyA presentA suggestionsA to the expected outcomes.A In these studiesA theA traditionalA procedureA has been the stock market’s reaction to buyout announcements (see DeAngelo, DeAngelo, & Rice, 1984; Madden, Marples & Chung, 1990). While some other studies did analyze the ex-postA workingA like Palepu 1990, Kaplan, 1989; Kaplan & Stein, 1993; Lichtenberg & Siegel, 1990; Liebeskind, Wiersema, & Hansen, 1992; Long & Ravenscraft, 1993a, 1993b; Seth & Easterwood, 1993; Singh, 1990, but their results are not alike.A Whilst, some recent researches have established that these firms do realize efficiencies with the productivity gains.A (See Lichtenberg and Siegel (1990) Wright, Thompson and Robbie (1992), Zahra (1995), Bruining and Wright (2002), Amess (2002), Amess (2003), Bruining, Bose lie, Wright, and Bacon (2005), Amess, Brown, and Thompson (2007), Harris, Siegel, and Wright (2005), Amess and Wright (2007)).A Nevertheless,A stillA the research work done by Long and Ravenscraft suggests that theseA buyouts may result in a long-term decline in R&D spending and profitability. We willA discuss here the enhanced Management strategy and mechanisms;A which formA the basis for innovation andA competitiveA learningA of firms in the ex-postA period that may lead to theA improvingA economicA performance and theA abilityA of a firm. Although theA agencyA theorists have discussed the incentive alignment effects of the increase in debt and theA managementA stockholdingsA associated with the buyouts (seeGarvey, 1992; Jensen, 1986). They had aA predilectionA andA inclinationA to gloss over the nature of these changes and improvements in organizational strategy and structure, which areA criticalA in bringing an improvement in the firms’ ex-post performance. Traditionally, these buyoutsA have been consideredA as a tool to streamline organizational processes and decrease in each unit cost (see Meuleman etA al., 2008).A In 1989,A Jensen had pointed out that buyouts can beA the sourceA ofA productionA of economic efficiencies by theirA superiorA governanceA framework.A This,A in turn helps to better align managers’ incentives to the shareholders in two ways.A Firstly, the higher level of debt in PTP firmsA convergeA the focal point of the firm on the periodical fixedA numberA of payments to theirA accountA holders. Hence it reduces theA potentialA suboptimalA useA of free cash flows by managers. Second, PE funds or investors are normally expected toA furtherA strictlyA observeA a firm’s investment strategy. This improvedA oversightA andA controlA has been historically viewed as an effective tool for a wide range ofA agencyA problems. These problems can be managerial entrenchment, operational level inefficiency, and, opportunistic behaviour.

Nevertheless in the newA scenarioA managersA are obligedA to periodically reportA toA investorsA and managements which is not performing up toA markA can be sacked (see Weir, C., Laing, D., Wright, M., 2005). This may result in better performance by PTPs backed by Private equity. The critics have been questioning the extent and nature of the strategies and effects on firms’ performances in the long run. Though some studies, have found firms restructuringA being associatedA with the decreases spending on R&D and innovation (see Hitt etA al., 1991, Hitt etA al., 1996, Long and Ravenscraft, 1993 and Hoskisson etA al., 1994). Even, these concerns can be given certain explanations like by Hall (1990). Firstly, it can be seenA clearlyA that these transactions led to the greater degree of controls with higherA leverageA and financial monitoring which, mayA stifleA the risk taking andA flexibilityA and limit the discretionary powers ofA management.

Secondly, the investors’ rent-seeking behaviour and the shorter time horizonA driveA the target companies toA growA swiftly. It enables themA to quicklyA returnA theA investmentA as soon as the value ofA enterpriseA increases. Thirdly, the managements’A energyA is consumedA in the restructuring processes. Thus in these cases firms may be more encouraged toA abandonA expenses onA innovationA or moreA advancedA organizational and knowledge management techniques.A Accordingly, there exists a need to probeA andA investigateA theA caseA that whether in ex post transactionA yearsA these firms doA applyA modern management techniques and concepts which in turnA induceA the increased spending on innovation and R&D.A The studies conductedA previouslyA have been analyzing the innovation and productivity which may beA an aftermathA of application of modern management techniques.A Therefore,A there exists a research gap in the literature.A AndA when today, the PTP market is much moreA substantialA andA sophisticatedA than it was ever, as buyouts have become aA relativelyA admired corporate restructuring tool worldwide,A it isA high time toA exploreA these questions. Likewise in Europe alone in 2007 there was theA investmentA of approximately 74 Billion Euros just by Private equity (PE) sector with almost 80 percent going for buyouts (EVCA). Moreover, we are observing theA setA of more buyouts even in more stable andA matureA sectors and technology firms with more stringer annuities (see Stromberg 2008). Furthermore,A thisA PE investing in these transactions have become more and more specialized due to increased inter firm’sA competitionA these days. Finally, the previous studies have largely focused onA publicA to private transactions only on US andA occasionallyA in other continents (see Meuleman etA al., 2008 and Lerner etA al., 2008). In this way, we will use theA particularA instrumentA orA measurementA scale which willA assessA theA applicationA of modern management techniques on seven dimensions along with level of innovation. I will also see their link with financial performance A The concept of Learning Organization (LO) is one of the mostA modernA management ofA organizationA concepts. It measures theA organizationA level of innovation and knowledge management.A AndA also itsA correspondingA impact on productivity and performance on bothA individualA andA functionalA levels. The concept ofA learningA has evolved from the concept of organizational learning, but it differs in that it includes not only theA learningA of the organization, but learning within the organization (Ulrich et al. 1993). Learning organizations createA consciousA processes that accelerate theA developmentA and utilization of knowledge across the system (Watkins and Marsick, 1997). Watkins and Marsick (1993, 1996)A identifyA the learning organization as one that capture, shares and uses knowledge to change the way theA organizationA responds to challenges.A Therefore,A LO concept willA allowA usA betterA andA moreA enhanced view of the organizationalA growthA and itsA learningA capabilities than some contemporary studies on mere productivity and InnovationA level.A It isA planned toA observeA the relationship between these seven dimensions collectively as well as directly to innovation performance alongside financial performance.A The moderation of firm size and Nature ofA backingA of PTPA agreementA will be investigated. In the third study we willA developA assessmentA orA appraisalA of the question that whether the innovation activityA is boomedA in going private concerns andA applicationA of modern management techniques and theirA relationshipA with theA innovationA and financial performance willA provideA aA significantA indicator, albeit indirect one of the returns on the corporate investments in Buyouts.A Since this research is aA premierA study in this direction,A and theA instrumentA to be used measures the relative increase inA levelA of Management techniquesA implementationA in the corresponding year than thoseA preceding Public to private transaction.A Therefore, it will in turnA examineA the reasons behind the suggested improved innovation activity in the ex postA periodA by PTP firms.

This relative absence of such research does notA encourageA leaders, managers, and employees toA embraceA learningA organization practices. Accordingly, there exists a compelling need to more firmly establish the linkage between the learningA organizationA conceptA and firm performance The third study will focus on the increased performance in the post transactionA time periodA withA the associationA ofA applicationA of the modern management techniques and concepts like Learning organization and assessment of corresponding level of innovation and its possible causes. This study will beA pivotalA in aA senseA that it will try to bridge the gapA in the literature regarding indirect indicators of the exA postA performanceA and corporate returns toA investors.A It will be aA premierA andA uniqueA researchA forA applicationA of modern management techniques and concepts in theA populationA of going private concerns. The main focus will be on ex-postA periodA improvement in going private concerns This study will focus on the EuropeanA sampleA of buyouts held in 1997 until 2008.A We willA focusA and analyze theirA improvementA andA extentA ofA applicationA of modern management techniques which may beA instrumentalA in spurring the improved performance along with increased innovation activity.A The adapted tool will asses and determine the corresponding level of application of innovation and efficient management control and structure in the form of Learning. A The scope of thisA articleA remains restricted toA analyzingA theA applicationA andA evaluationA of Modern Management techniques in European Buyouts population and their corresponding relationship with perceived improved financial performance. I will also try toA discernA the difference in thisA applicationA of modern management techniques within the different groups of PTPs i,eA weather PE backed deals are more likely toA implementA and follow the modern management concepts than those backed byA managementA or otherwise. Then, weA will also try toA establishA the relationship betweenA these improved levels of modern management techniquesA applicationA and the financial performance. It is an empiricalA researchA which used quantitative data thatA was collectedA from 244 respondents of 203 organizations of European PTP. To measure innovation,A an eight-itemA scaleA was usedA thatA wereA drawnA from an assessment tool entitled Assessing StrategicA Leverage for the Learning Organization (ASLLO) (Gephart etA al,A 1997). Structural equation modeling (SEM)A was usedA toA assessA theA researchA model. SPSS and AMOS were usedA for the data analysis. The theoretical frameworkA for this studyA was designedA to minimize contaminationA in data collection and toA enhanceA reliability andA validity in the analysis and theA interpretationA ofA data.A The scalesA ofA learningA organizationA and organizationalA innovationA were pretestedA to ensure their reliability and validity.A Cross cultural adaptability of instrumentsA was takenA in to account. The study used short form of dimensions of learning organization questionnaire (DLOQ) toA assessA theA extentA ofA the learning organizationA in the organizations. DLOQ developed by Yang, Watkins & Marsick, (2004) has seven dimensions.A (See Watkins and Marsick (1995, 1996, 1997, 1998, 1999, 2003, 2004),Yang etA al., 1998). It is an already tested and standardisedA measureA of Modern Management Techniques and concepts. This instrument measures at seven dimensions.A It also measures it on three corresponding levels i,e Individual Level Team Learning System or Organizational Level Learning Then with the help of SPSS and Amos theA applicationA of modern management techniquesA was analyzedA along with testing it with different groups of PTP i,e Management Backed Deals Private Equity (PE) Backed Deals Then with theA helpA of structural equation modelling and path analysis, we will analyze their relationship with improvement in performance also in ex postA period. LO research is relatively new in the European PTP’s industry.

This research has significantly added to the existing body of knowledge in the domain of LO by effectively linking with innovation. This provides a strong case for employing LO in order to make innovation a regular phenomenon within the organizations of European PTP and encouraging organizations to transform them into learning organizations. The findings of the study may have some interesting implications for managers and organizations. Firstly, this research provides validity and reliability to the use of innovation and LO scales. Leaders can use these scales for their organization to measure perceived level of LO and innovation. For the leaders who want to make their organization learning organization, it is important to measure the extent of LO during organizational development phase. It is important to design, modify and implement the change strategy. Secondly, this study shows a strong link between learning organization and innovation.

The leaders and managers who have thirst for continuous innovation, the study provides a convincing solution to them. This provides a strong case for employing LO in order to make innovation a regular phenomenon within the organizations of European PTP and encouraging organizations to transform them into learning organizations. Lastly, it is important to note that there is strong positive relationship between Learning organization and innovation but there is no relationship between the dimension of LO and innovation. These findings serve as caution to the managers who want to make their organizations a learning organization for the innovation. This study forcefully recommends the managers to employ all the dimensions together in harmony and effectively integrate them to make a learning organization. If they fail to do so, the may not be able to get the required results. As a result of conducting this research, the following recommendations can be made: European PTP’s organizations should adopt LO practices in order to become innovative and to gain competitive advantage. The ‘proof of concept’ presented in this thesis should be able to provide a sufficient rationale for European PTP’s organizations to start adopting LO practices. The current study proves the validity and reliability of modified 6 dimensional version of DLOQ. European PTP’s organization, therefore, should use this instrument to measure the extent of LO within the organization.

Then these organization have develop suitable strategy to employ the LO practices. The organizations who desire to deploy LO practices should implement the concept of LO as whole and all dimensions should employ simultaneously. Otherwise, they may not be able to get the required results. It is an empirical study which used quantitative data that was collected from 244 respondents of 203 organizations of European PTP. The study was successfully modified the construct of learning organization given by Watkins and Marsick (2004) in European PTP’s context.

The modified construct has good reliability and validity in European PTP context. The study was also able to establish the construct validity of innovation performance in European PTP context. The study proved that there is strong relationship between the extent of learning organization practices and the innovation performance of that organization. It is also found that the size of the organization, type of the organization whether it was public or private and type of business activity in which the organization is involved has moderating effect on the relationship of LO and innovation. The most interesting and valuable findings of the study was that there is no direct effect of the dimensions of learning organization on innovation performance.

They affect the innovation performance of the organization when they convergent at one point to make learning organization. Such association between the existence of behavioural practices and strategies related with the learning organization concept and firms’ financial performance has not been passably recognized in the literature. . This research also suggests a positive association between learning organization practices and objective measures of firms’ financial performance. The findings offer tentative support for some of the more normative assertions that are found in the learning organization literature. This research study lends credence to the existence of a business case for embracing learning organization practices and, as such, represents a foundation for future studies. The incorporation of objective measures of firms’ financial performance with perceptual survey data represents a unique methodology that has not been much employed to date in the learning organization literature. This research suggests the existence of a positive alliance between the seven action imperatives, articulated in the Watkins and Marsick (1993, 1996a, 1996b, 1997) conceptualization of the learning organization, and firms’ financial performance. Future research should further investigate our exploratory findings by integrating a wider variety of financial and nonfinancial indicators in different contexts with larger, more inclusive sampling strategies. For example, longitudinal studies that examine the lagged effects of behaviours characteristic of the learning organization may further contribute to our understanding of how the firm performance may be enhanced under new circumstances in post deal horizon.. Moreover ex post performance of firms may also be analyzed on varying levels of innovation and sustainable development scales measuring their adaptability and acceptance of modern management techniques and concepts which may in turn helpful in establishing the fruitfulness of these buyouts as a more viable corporate strategy along with being in line with modern management theories. Constructing a valid instrument is an ongoing process.

Although evidence of convergent validity of the DLOQ has been shown, yet it failed to show the discriminant validity. The discriminant validity of 6 dimension model needs to be fully explored in the future. Further studies are needed for the scale with larger sample sizes and different types of organization. The study found very strong effect of learning organization on the innovation performance. This needs to reconfirm and verify by the further research in European PTP’s context.

Current study selected the organizations for the data collection on the basis of convenience. A study should be conducted in which selection of the organizations should be judgmental. The known Learning organizations may be selected and then their innovation performance may be studied to verify the findings of the research. Future research can also investigate additional factors that may mediate or moderate the relationship between learning organization and innovation performance. The current study found that the strength of relationship is stronger in PE Backed PTPs compared Management Backed PTPs. This is deviation from the literature; therefore, it is needed to conduct another research to confirm the findings of the current study. The current study fails to show the direct effect of dimensions of LO over innovation. Future studies are needed in this regard.

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