So far this year, Viking Venture has successfully delisted two of our companies. It is a demanding and time-consuming process, which is also very burdensome for management. Nevertheless, it has proven to be the right choice for our companies and their stakeholders. In this article, we share our key learnings from taking our companies from public to private. Moreover, what have been the most significant challenges, and how should you prepare for a public-to-private (P2P) process.
Written by: Joar Welde, Partner at Viking Venture
At Viking Venture, we invest in and develop growth stage business to business (B2B) SaaS companies. We do this in two ways. The first is to create a solid organic growth engine; the second is to enter new markets, expand into new products or consolidate market positions through acquisitions. On average our companies grow 44 % annually split evenly between organic and inorganic growth.
Two years ago, the market for taking larger B2B SaaS companies public was very attractive. We saw this as a perfect opportunity for our larger portfolio companies with an organic and inorganic (M&A) growth strategy. We ended up IPO’ing four of our portfolio companies during this period and raised enough capital to accelerate our existing growth strategies. At the same time, we as an investor want to provide liquidity events to our investors within specific time periods. These IPOs enabled us to do so by selling off portions of our shares while remaining a large and active investor.
During the autumn of 2021, it became clear that the public markets had changed their views on B2B SaaS growth companies. It became more challenging to raise capital given lower valuations. Access to capital is essential for companies to continue their growth. It became evident that we needed to take our companies off the stock market and bring in new owners with capital to continue our strategy. Our analysis was that access to capital in the current market for these types of companies would become more and more difficult, and we do not know when this will change.
When a public company goes private, a company or investor buys all outstanding shares at an agreed-upon price. The process of delisting companies is quite similar to that of selling private companies. However, there are a lot more rules and regulations you need to comply with. The P2P process is quite complex and burdensome for the administration. The companies must ensure they have everything in order, so a rigorous financial, legal, technical, commercial, and organizational review of the company is needed.
After a complete review, you get in touch with possible buyers. The Board of Directors run the process, evalute the different proposals and negotiates draft transaction agreements with potential buyers. It is the Board that decides whether to recommend an offer or not. Once the recommend buyer has confirmed their offer, the legal requirements and begun a due diligence process, the bid is made public, and the buyer cannot withdraw unless their conditions are not met. A typical condition is to get minimum 90% acceptance from existing shareholders.
The P2Pprocess typically takes 6-12 months and is not straightforward. The process is labor intensive and require significant investments. However, for our companies, it has proven to be the right thing to do. Now they have brought in new owners who can enable them to continue to follow their previous strategy.
In addition we have been able to create good returns for the shareholders selling our companies at premiums of 60% to 120% compared to the pricing 30 days before the offer. The alternative to the P2P process would be remain owners of the companies on the stock exchange over a longer period of time. However, with the current development, the liquidity in the shares has been low, meaning it is difficult to sell should you wish to do so. Also, no access to growth capital would slow the companies down.
Through these processes, shareholders have received offers for their shares at a premium to the current price and given the opportunity to reallocate their capital into other areas. At the same time, it has been the right choice for the companies, as they can continue to work towards their chosen strategy.
You avoid costs by not having the company on the stock exchange, which is around 5-15 million NOK a year, depending on the company’s size. As a private company, you can also share information more freely on plans and status within the organization and towards investors. Internal communication is a challenge on the stock exchange as you must be careful with the information you share internally. Also, being listed on the stock exchange, you have to share many details externally that others, including competitors, can use to their benefit.
The most demanding aspect of a P2P process is uncertainty, it takes time and diverts the management’s attention away from daily operations. The companies need to put several initiatives on hold once the process has started, as it requires complete focus from the management.
What surprised us the most was how thorough the buyers were. We have sold many companies over the years with comprehensive due diligence processes. However, this was something else in terms of the level of detail in the due diligence and the strategy going forward. The result is that the companies have a well-worked plan from day one of the investment.
Having people on the team with experience in P2P processes is crucial. So many small and big things can create bumps in the road. For example, you cannot share forward-looking data that has not been disclosed to the market. If you share something, it must be put forward to everyone. It may also be that the buyers require some form of prior acceptance among a certain percentage of the shareholders.
Timing is everything; our companies were sold in uncertain and falling markets. Surprisingly enough lower valuations create opportunities for potential buyers of our companies while cash becomes more valuable for existing shareholders making it possible to buyers and sellers to agree on a price and succeed in a P2P process.
With rising interest levels and global uncertainty investors and buyers of our portfolio companies become more focused on profitability and positive cash flows, while our companies are in a growth phase, investing. It would have been a good idea for us to have shifted focus slightly and reduced some of the growth costs earlier. In the end, the buyers priced our companies on EBITDA. So turning our companies away from growth and more towards profitability ahead of the P2P process would have been wise.
Want to learn more from the CEOs in the companies who has gone through a P2P process? We have talked to the people involved about their journey and what is next for their companies.
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