Going private: A guide to PE tech acquisitions
Private equity (PE) firms spent a record $226.5 billion on take-private transactions globally in the first half of 2022, which is 39% higher than the same period in 2021. While overall mergers and acquisitions (M&A) activity slowed significantly in the second half of last year with equity market volatility, the volume of large acquisitions by PE firms looking to capitalize on a period of lowered valuation expectations is rebounding as a result of bottoming valuations and a large supply of public company targets.
When public companies underperform, PE firms in pursuit of equity value creation opportunities are eager to purchase and take these organizations private.
Despite economic cycle peaks and troughs, these types of transactions represent a large and growing share of overall M&A activity. With this growth in the volume of PE-backed transactions, it’s increasingly important to understand the basics of these transactions and the potential implications on key stakeholders, including customers, partners and employees of the acquired company, in particular, those who are left to wonder how the acquisition will affect them.
Why do PE firms purchase publicly traded companies to take them private?
PE firms are investment funds that specialize in buying underperforming businesses with the goal of fixing performance and selling the business later for a profit. While PE firms can also buy private companies or take minority ownership stakes in businesses, their traditional approach has most often been to acquire publicly traded companies and take them private.
The software industry has seen significant take-private activity in the last year — Coupa, Citrix, Anaplan, Zendesk, Duck Creek and more — and the volume of such transactions is likely to increase given many newly public software companies (those listed in the last three to four years) are trading below their IPO valuations.
There are many reasons a PE firm chooses to buy a publicly traded company. The most common return on investment drivers (which by no means are mutually exclusive) are to significantly improve cash flows from operations, fix the company’s business operations and take advantage of untapped growth opportunities.
What happens after an acquisition is announced?
After the buyout agreement is signed and publicly announced, typically a deal will go into a multimonth pre-closing period while regulatory approvals are processed, debt financing is raised and closing conditions are satisfied. During this pre-closing period, the management of the acquired business generally freezes new investments, which often includes reduced hiring and the transition to near-term cost-rationalization.
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The shift in priorities and investments typically result in the elimination of many existing initiatives in order to meaningfully improve profitability and service the newly raised debt. PE firms’ playbooks vary depending on the objectives of the acquisition, but in general also shift focus from the short-term quarterly results of public companies to long-term sustainable financial performance as a private company.
Let’s use customer support as a basic example. The PE firm will thoroughly review the function’s structure and benchmark key performance indicators. This will include reducing the layers of management to create a flatter organization, centralizing disparate geographic and product specialty teams, and shifting significant team headcount to low-cost (and often international) geographies.
While each PE firm has differing playbooks for different investment scenarios, there are some immutable truths that almost all PE firms follow. Chief among them is efficiency. Simply put: PE firms run a tight ship. They focus on materially increasing profitability with an eye toward exiting the company they have invested in (i.e., selling or taking public again) for substantially more than what they paid to acquire it.
Regardless of whether the PE firm’s strategy is to enhance cash flows from the acquired company’s business, turn a struggling business around, use additional acquisitions to quickly generate scale or capitalize on untapped growth opportunities, cost rationalization and the ruthless search for inefficiencies across the business are constants. The amount of cost cutting and the resulting impact to the long-term operations of the business and its stakeholders is dependent on how inefficiently the company was run before the acquisition.
If the acquired company had embraced a “growth-at-all-costs” (GAAC) strategy, which entails investing heavily in sales and marketing to aggressively grow top-line revenues with little concern for profitability or cash flow generation, the inefficiencies across the business will be material. This means the cost cutting by the new PE firm will be significant and the business disruption will be more dramatic during this transition of ownership and implementation of the prescribed changes to the business.
If the acquired company embraced a “growth-at-a-reasonable-price” (GARP) strategy, then the cost cutting and operational disruption will likely be much less extensive. For companies that were run more efficiently prior to acquisition, there are fewer opportunities to root out inefficiencies and therefore the PE playbook in this scenario will focus on growth opportunities, new investments and additional M&A.
As a key business stakeholder of an acquired software company, how can I assess the impact to me?
PE firms rarely disclose the details of their strategy or their corresponding playbook for a particular acquisition. A stakeholder’s ability to independently discern the PE firm’s investment rationale or case for the acquisition can make all the difference when attempting to predict how the acquisition, and following actions taken by the PE firm, will affect them. First, determine which primary investment drivers the PE firm is pursuing and whether the acquired company was a GAAC or a GARP company prior to the acquisition. GAAC companies with little or negative cash flow will typically undergo far greater restructuring, business changes, cost cutting and a longer and more uncertain period of disruption for stakeholders.
Shantanu Nayaren, the CEO of Adobe, recently noted the risks of operating a GAAC model when he said, “I think the macroeconomic environment, honestly, is being used as a mechanism to say: ‘Is prioritization being done appropriately?’ There is an element of the financial community that is looking at … where perhaps it was growth at all costs … now they’re looking at a balance of growth and profitability.”
A tough economic environment brightens the outlook for buyouts
All signs point to robust technology PE buyout activity in 2023 supported by lower market volatility, lower public company valuations, a more stable interest rate environment and large pools of available PE capital. M&A is a part of doing business, and it’s important to recognize that the impact and disruption of a PE take-private deal may be felt for years. The accompanying periods of dramatic change will involve hard lessons for a broad mix of stakeholders. Success is not guaranteed — with GAAC businesses in particular, management team turnover, product rationalization and new acquisitions, along with the integration of previous ones, can all complicate the PE owner’s business transformation effort and prolonged periods of disruption.
PE investments can pave the way for long-term and sustainable operational success when coupled with talented and dedicated employees and a commitment to customer success and a responsible growth plan that balances growth and profitability.
Best M&A firms: A guide to the leading companies and experts
The success of an M&A deal depends on many factors: from thorough due diligence to strong leadership and sufficient integration planning.
However, lots can also hinge on the team that’s involved in the M&A process. Besides the corporate development team, C-suite, and business unit leadership, external advisors remain one of the main stakeholders of the M&A transaction.
In this article, we focus on the importance of the external experts from an M&A firm in the deal execution, explore what services it provides, and list the best mergers and acquisitions firms in the world.
What is an M&A firm?
M&A firms, or M&A advisory firms, are specialized financial institutions or consultancies that provide advisory services to the sell- or buy-side during mergers and acquisitions or any other type of corporate transactions.
An M&A firm typically offers expertise in such fields as law, audit, or finance and serves as an intermediary between the deal sides managing the whole transaction process. Mergers and acquisitions firms help companies outline their strategic goals and achieve them faster and more efficiently. Based on the advisory services provided, M&A firms can be broadly divided into investment banks, law firms, financial advisory firms, and audit firms.
Additional read
Key services offered by M&A firms
Let’s now take a closer look at how exactly M&A companies help businesses navigate corporate transactions. M&A consulting firms assist the deal-making process participants with the following:
M&A firms provide companies with strategic guidance on potential acquisitions, mergers, divestitures, private equity transactions, and other corporate restructuring activities and help develop the right acquisition strategy.
An advisory firm helps companies analyze market trends, competitive landscape, and industry dynamics to identify potential opportunities and risks before entering the transaction.
M&A firms also help with business valuations to determine the fair value of target companies or their major assets.
In case a client doesn’t have a target identified yet, an M&A firm can help with that. It leverages a global network and relationships to source and initiate deals and identifies potential acquisition targets or buyers that align with the client’s strategic goals.
Top M&A firms have the specific expertise needed during the due diligence process. For instance, a law M&A firm specializing in legal issues can handle the legal due diligence and financial advisory can manage the review of financial records. That’s why deal sides engage M&A firms in due diligence to ensure the most efficient process and mitigate risks.
M&A consultants help clients with defining the optimal structure for the transaction, including consideration of financial, tax, and legal implications. They also assist in arranging transaction financing and negotiating terms and conditions of the deal to achieve the best possible outcome for the client.
M&A advisory experts assist in developing a comprehensive integration plan to ensure a smooth transition and maximize synergies post-transaction. They also help with managing the cultural and organizational changes resulting from the transaction.
- Regulatory and compliance support
Professionals from M&A firms help companies obtain necessary regulatory approvals and navigate their complex requirements. Having an expert team involved in this process ensures compliance with relevant laws, regulations, and industry standards throughout the transaction.
M&A companies provide merged businesses with ongoing support to implement the integration plan and achieve the desired outcomes. They assist in monitoring the performance of the merged or acquired entity to ensure that it meets the strategic and financial objectives of the parent company.
M&A firms can also advise on the sale or spin-off of business units or assets that no longer fit the client’s strategic goals. They help to prepare the company for sale, including enhancing value, improving financial performance, and addressing potential deal obstacles.
10 best mergers and acquisitions firms
Now, let’s review the top mergers and acquisitions consulting firms that help businesses undergo M&A and other corporate finance processes worldwide.
1. Goldman Sachs
Type of advisory services: Investment bank
Deals value: $671 billion (2023)
Revenue: $46.25 billion (2023)
Goldman Sachs is one of the top M&A investment banks and securities and investments management firms in the world. To be precise, it’s the second-largest investment banking company in the world by revenue and the biggest one by deal value.
The company was founded in 1869 as a small business specializing in buying and selling promissory notes in Lower Manhattan. Since then, it has grown into a successful investment bank with dozens of offices around the world that is headquartered in New York.
Goldman Sachs offers services in investment banking (especially restructuring and mergers and acquisitions), asset and wealth management, securities underwriting, and prime brokerage. It also operates hedge funds and private equity funds and is considered a market maker for many types of financial products.
The firm’s focus is typically complex and high-profile deals, however, they can also facilitate acquisitions for lower middle market companies as well.
Among the most notable deals Goldman Sachs was involved in were Amazon’s acquisition of Whole Foods Market in 2017 and the merger of the merger of Exxon and Mobil in 1999.
2. Morgan Stanley
Type of advisory services: Investment bank
Deals value: $111 billion (2023)
Revenue: $15 billion (2023)
Morgan Stanley is also on the market leaders list of the top investment banking firms. It’s a multinational investment bank and financial services company with offices in more than 40 countries and headquarters in New York.
It was founded in 1935 by a grandson of J. P. Morgan as a response to the Glass–Steagall Act, which required a separation of commercial and investment banking business in America.
Morgan Stanley provides comprehensive services in investment banking, securities management, wealth management, and investment management. Morgan Stanley has a strong reputation for its M&A advisory services, offering clients extensive solutions for complex transactions.
Among the most notable deals Morgan Stanley was involved in are the merger of Comcast and NBC Universal in 2011 and the acquisition of LinkedIn by Microsoft in 2016.
3. Wells Fargo
Type of advisory services: Investment bank
Deals value: $45 billion (H1 2024)
Revenue: $82.6 billion (2023)
Wells Fargo is an American multinational financial services company and one of the largest M&A firms worldwide.
It was founded in 1852 with the intent to provide “express” and banking services to California which was undergoing the rapid growth of the Gold Rush. Now, Wells Fargo operates in 35 countries and is headquartered in San Francisco. It’s also one of the “Big Four” banks in the US, together with J.P. Morgan, Citigroup, and Bank of America.
Wells Fargo specializes in providing banking, investments, mortgages, and consumer and commercial finance. While not as prominent in M&A as some of its peers, Wells Fargo offers a range of advisory services, focusing on middle-market firms’ transactions.
Among the most notable deals Wells Fargo advised on is Fiserv’s acquisition of First Data in 2019.
Explore the current middle-market M&A deal size and trends in our dedicated article.
4. Citigroup
Type of advisory services: Investment bank and financial advisory firm
Deals value: $34 billion (2023)
Revenue: $78.46 billion (2023)
Citigroup is an American multinational investment bank and financial services company that is also one of the top mergers and acquisitions companies in the world.
Citigroup was formed in 1998 by a merger of Citicorp and Travelers. In 2002, Travelers was spun off from the company. Now, Citigroup is headquartered in New York and serves clients worldwide. It’s also one of the eight global investment banks in the Bulge Bracket, a list of the largest investment banks that mostly serve governments, institutional investors, and large corporations.
Citi offers a broad range of financial products and services, including consumer banking, corporate banking, investment banking, securities brokerage, and wealth management. It also provides comprehensive M&A advisory services, including strategic advice, transaction execution, and capital raising. The firm is well-regarded for its international reach and ability to handle cross-border transactions.
Among the most notable deals Citigroup was involved in was the Allergan and Actavis merger in 2015.
5. J.P. Morgan
Type of advisory services: Investment bank
Deals value: $76 billion (2023)
Revenue: $158.1 billion (2023)
J.P. Morgan is one of the leading providers in investment banking, asset management, business sales and acquisitions processing, and commercial banking.
It was founded in 1871 by J.P. Morgan, though the early history of the firm can be traced to 1799 with the founding of the Manhattan Company. Since then, the company has grown into the fifth-largest global investment bank by assets in 2024 and #1 on the Forbes 2000 list as of May 2024.
The firm is a leader in M&A advisory, known for its expertise in large-scale and complex transactions. J.P. Morgan provides strategic consulting, valuation, deal structuring, and integration services.
Among the most notable deals it was involved in are the merger of Dow Chemical and DuPont in 2017 and the merger of Sprint and T-Mobile in 2020.
6. McKinsey & Company
Type of advisory services: Financial and M&A advisory firm
Deals value: N/A
Revenue: $16 billion (2023)
McKinsey & Company is an American multinational strategy and management consulting firm that works with government agencies, corporations, and other types of companies.
It was founded in 1926 by a professor of accounting at the University of Chicago. Now, it has more than 130 offices around the world and is headquartered in New York.
McKinsey provides strategic and operational advisory services for M&A, focusing on creating value through mergers and acquisitions. It advises on numerous M&A transactions across various industries, often focusing on post-merger integration and value creation. Additionally, the firm’s specialists have expertise in digital and technology transformation, helping their clients leverage technology for performance improvements.
Among the notable deals McKinsey advised on was Dell’s acquisition of EMC in 2016.
7. Skadden
Type of advisory services: Law firm
Deals value: $188 billion (Q1 2024)
Revenue: $3 billion (2023)
Skadden is an American multinational law firm that provides a wide range of legal services including M&A, corporate finance, litigation, and regulatory advice.
It was founded in 1948 by Marshall Skadden and a group of other professionals, which formed the firm’s full name — Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates. Since then, Skadden has grown to a world-renowned law firm with about 3,500 employees, 21 offices worldwide, and headquarters in New York.
Skadden is known for its expertise in handling high-stakes M&A transactions, offering legal advisory services to corporations, investment banks, and private equity firms.
Some of the notable deals Skadden was involved in include the acquisition of LinkedIn by Microsoft in 2016.
8. Barclays
Type of advisory services: Investment bank and financial advisory firm
Deals value: $35 billion (2023)
Revenue: $31 billion (2023)
Barclays is a multinational universal investment bank and financial services company offering services in investment banking, personal banking, wealth management, and more.
It was founded in 1690 in London. Since then, it has grown to a large European bank with offices in more than 40 countries and over 80,000 of employees. Barclays is the fifth-largest European bank by assets as of 2023.
Barclays provides comprehensive M&A advisory services, including strategic advice, financing, and risk management solutions. It advised on such deals as the acquisition of BG Group by Royal Dutch Shell in 2016.
9. Deloitte
Type of advisory services: Audit and accounting firm
Deals value: N/A
Deloitte is one of the largest and world-renowned audit and multinational professional services networks, officially known as Deloitte Touche Tohmatsu Limited.
It was founded in 1845 in London and expanded into the United States in 1890. Now, it’s a large corporation that operates in more than 700 locations worldwide and is one of the Big Four accounting firms, along with EY, KPMG, and PwC.
Deloitte offers various M&A advisory services, including strategy, due diligence, transaction execution, and post-merger integration. It has advised on numerous mid-market transactions, leveraging its extensive industry knowledge and global reach.
Some of the notable transactions in Deloitte’s portfolio include Dell’s acquisition of EMC in 2016 and Takeda Pharmaceutical’s acquisition of Shire in 2019.
10. KPMG
Type of advisory services: Audit and accounting firm
Deals value: N/A
KPMG, officially known as KPMG International Limited, is a multinational professional services network and one of the Big Four accounting firms.
The early notes of the company’s operations appeared in 1897. Now, it’s one of the top mergers and acquisitions firms operating in 145 countries, with legal headquarters in London.
The variety of services KPMG provides can be divided into three main lines: tax, advisory, and audit. Its M&A advisory services include strategic advice, financial due diligence, valuation, and integration services.
Among the notable deals KPMG assisted with is AstraZeneca’s acquisition of Alexion Pharmaceuticals in 2021.
Key takeaways
- An M&A firm is a dedicated advisory firm that provides advisory services to a sell- or buy-side during the M&A deal execution.
- Among the main services provided by M&A firms are assistance with market research, valuation, due diligence, strategic advice, deal structuring, integration planning, post-merger integration execution, exit strategy planning, and management of regulatory and compliance requirements.
- Some of the top M&A firms include Goldman Sachs, Morgan Stanley, Wells Fargo, Citigroup, and Deloitte.
https://techcrunch.com/2023/02/27/going-private-a-guide-to-pe-tech-acquisitions/https://mnacommunity.com/insights/top-merger-and-acquisition-firms/
