In mergers and acquisitions (M&A), a company’s ownership structure can have a huge impact on a deal. Private and public companies often have different structures, and there are complexities to consider for each. Understanding whether a company is private or public is foundational.
These distinctions influence everything from valuation to deal structure, negotiation strategies, and regulations. For companies exploring M&A opportunities, knowing how public and private companies operate can make or break a deal.
In this article, you’ll learn about the differences between private and public companies. You’ll also find their respective roles in M&A, and examples of how different s deals unfold.
What Is a Public Company?
A public company has shares that trade on stock exchanges like the NYSE, Nasdaq, or Euronext. These shares are accessible to the general public, and the company must adhere to stringent regulatory and reporting requirements. Here are some characteristics of public companies:
- Ownership: Shares are owned by a wide range of investors, from institutional funds to individual retail investors.
- Regulation: Public companies must comply with regulations from entities like the SEC (in the U.S.) or ESMA (in Europe). They’re required to disclose quarterly earnings, annual reports, and other financial details.
- Liquidity: Shares can be bought and sold with ease, providing investors with high liquidity.
- Valuation: Stock price helps determine market capitalization, making public companies’ valuations more dynamic.
Example of a Public Company M&A Deal: The acquisition of LinkedIn by Microsoft for $26.2 billion in 2016 was a landmark deal. Since LinkedIn was also a public company, it required different shareholder and regulatory approval. It also came with more transparency about the terms and valuation.
What Is a Private Company?
A private company, on the other hand, is owned by a smaller group of shareholders. This often includes founders, private equity firms, or family owners. Shares are not publicly traded, and private companies aren’t subject to the same level of regulatory scrutiny as public ones. Here are some characteristics of private companies:
- Ownership: Often held by a concentrated group of investors or family members.
- Privacy: Financial performance and operational details are not disclosed publicly.
- Valuation: Valuation is typically determined during private negotiations or fundraising rounds.
- Capital Access: Raising funds often involves private investments, venture capital, or other private equity.
Differences Between Private and Public Companies
While both public and private companies can be acquisition targets or acquirers, key differences shape how M&A transactions unfold:
- Transparency: Public companies must disclose financials. On the other hand, private companies can keep this information confidential.
- Regulatory Oversight: Public companies face stricter governance due to stock exchange and government regulations.
- Access to Capital: Public companies raise funds through open equity markets, while private companies rely on private funding.
- M&A Complexity: Acquiring a public company often involves more shareholder approvals and regulatory reviews. For private acquisitions, they tend to have fewer hurdles.
The Role of Private and Public Companies in M&A
Public and private companies play distinct roles in M&A. Their different operational and financial structures impact dealmaking.
Public Companies in M&A
Public companies often pursue M&A for market expansion, competitive advantage, or access to new technology. Here are key characteristics of public M&A:
- Shareholder Involvement: Deals can require wider shareholder approval, which can slow the process.
- Transparency: The terms, valuation, and rationale for the deal often requires disclosure.
- Market Reaction: Public company acquisitions often trigger extra market activity, affecting stock prices.
Private Companies in M&A
Private companies typically target M&A for strategic growth or as an exit strategy for owners. Here are key characteristics of private M&A:
- Negotiation Flexibility: With fewer shareholders and less oversight, private M&A can allow for more tailored deal structures.
- Speed: Without the need for extra regulatory filings or shareholder votes, deals can close faster.
- Confidentiality: Private companies can have more discretion over a deal’s details.
Examples of M&A Deals
Public Company Deal: A large pharmaceutical company, listed on the FTSE 100, acquires a mid-sized biotech firm for £5 billion. The deal includes a mix of cash and stock, with shareholders voting to approve the acquisition. Regulatory bodies like the Financial Conduct Authority (FCA) also review the transaction to ensure compliance.
Private Company Deal: A private equity firm acquires a family-owned European manufacturing company. The deal is valued at €500 million and involves only a few key shareholders, streamlining the negotiation process.
Best Practices for M&A with Private vs. Public Companies
Regardless of whether a company is public or private, successful M&A deals require careful planning and execution. Here are some best practices:
- Understand Stakeholder Dynamics: Public deals often require navigating many different shareholder interests. On the other hand, private deals can be more direct negotiations with owners or a small group of investors.
- Tailor Due Diligence: Public companies often have more transparency with audited financial data. Private companies may require deeper investigation.
- Evaluate Valuations: Public companies have frequent market valuation updates as shares trade hands on an exchange. Private companies tend to have old valuations from past private deals. There’s less pricing data to work with. However, both can rely on earnings multiples, comparable transactions, or discounted cash flow models.
- Plan for Integration: Ensure cultural and operational alignment. The integration process can vary between public and private targets.
Real-World Impact for M&A Stakeholders
The private vs. public distinction carries weight for all parties involved in an M&A transaction:
For Acquirers:
- Public company deals often require robust financing strategies and a strong case to win over shareholders.
- Private company acquisitions demand strong negotiation skills and valuation assessments due to limited public data.
For Sellers:
- Private company owners must consider the value of confidentiality and the potential tax impacts of selling.
- Public company executives must balance shareholder expectations with the long-term benefits of the deal.
For Investors:
- Public M&A offers transparency but can cause share price swings due to market reactions.
- Private M&A often provides access to niche opportunities with potentially higher returns. Although, these deals can carry greater risks due to limited disclosure.
Private vs. Public Company Key Takeaways
Whether private or public, companies bring different strengths and challenges to the M&A table. Understanding these distinctions helps with structuring deals that align with strategic goals and mitigate risks. Here are some key takeaways:
- Public vs. Private Overview: Public companies are more regulated, transparent, and market-driven. On the other hand, private companies are confidential and can require more gathering and verification of data.
- Their Roles in M&A: Public companies often pursue scale and market access, while private companies focus on growth or providing owners with an exit strategy.
- Expert Guidance: Acquinox Advisors specializes in navigating public and private M&A deals. This can help improve outcomes for all stakeholders.
Need help navigating your M&A deal? Reach out to Acquinox Advisors for expert guidance and tailored solutions. This can help you optimize your deal process and outcomes. Contact us today for more information.
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