A Wave of Private Equity Takeovers: A Closer Look at 2020-2021 IPOs

The past few years have witnessed a surge in initial public offerings (IPOs), followed by a significant uptick in take-private transactions. According to Descher, LLP’s Global Private Equity Outlook survey completed in November 2023, 94% of private equity respondents said that they are likely to pursue take-private transactions in the coming year. This was a significant reversal from private equity sentiment in 2022 when only 13% of respondents expressed intentions of pursuing take-private transactions.

The Rise of Take-Private Transactions

Several factors have contributed to the increased popularity of take-private transactions in recent years:

• Market Volatility: The turbulent economic climate, characterized by global uncertainties and market fluctuations, has made public markets less attractive for some companies and has led to lower valuations for some recently public companies, even as the broader market is up over its 2022 highs.

• Private Equity Funding and Strategic Considerations: The abundance of private equity capital has provided a lucrative avenue for companies seeking to exit the public market. According to S&P Global, private equity and venture capital funds held a record $2.62 trillion of total uncommitted capital as of July 10. Private equity firms see this as an opportunity to acquire high-quality assets, reduce compliance and operating costs, and execute strategic opportunities.

• Regulatory Burden: Many companies that IPO’d during the market highs of 2020 and 2021 are now struggling with the burdens of public ownership, such as shareholder expectations, compliance requirements, and growing climate regulations.

Trends in Take-Private Deals

Between 2021 and 2023, take-private deals have seen substantial growth. Private equity (PE) firms in particular have driven this surge by capitalizing on reduced public company valuations. In 2022, take-private deal value was up approximately 25% from the previous year, cycling a prior year increase of more than 150% according to data from S&P Global.

Accounting Implications of Going Private

Beyond legal and regulatory hurdles, the successful transition from public to private can involve several unique accounting challenges:

• Determining the Accounting Acquirer: This generally seems straightforward in a buyout transaction; however, the determination of which legal entity is the accounting acquirer is especially important for determining the future financial reporting requirements for the combined entity. Private Equity deals usually involve numerous transaction-related entities for instance NewCo, HoldCo, Buyer Subs, Merger Subs, etc. The assessment of whether these entities are substantive or non-substantive under the accounting rules can affect the determination of accounting acquirer. For example, in some cases, a NewCo entity may be formed to acquire the target company. If NewCo is a non-substantive entity, it may be disregarded for accounting purposes, and the accounting acquirer may be the target itself, or it may be the entity that controls NewCo. It is important in these situations to understand the intricacies of the transaction and evaluate control in accordance with the principles of ASC 810, Consolidation.

• Determining the reporting entity for financial reporting purposes: Once the accounting acquirer is determined, the company must identify which legal entity will be the reporting entity going forward. While this determination is simple for a publicly traded entity, the reporting entity determination for the post-transaction organization may be determined by, and generally corresponds with audit requirements within the group’s legal formation and operating documents, credit facility agreements, or ultimate owner preference. The company may end up with one or more of the following reporting entity determinations and the resulting reporting requirements:
   
  • The acquiring entity is the new reporting entity: Under this outcome, the acquiree will be consolidated within the acquirer, and the acquirer will apply business combination accounting (ASC 805) to its acquisition of the acquiree. Assets and liabilities of the acquiree are fair valued by the acquirer on the acquisition date.
   
  • The acquiree continues as the reporting entity (push-down accounting is not applied): The acquiree will continue preparing financial statements with no changes in basis to its assets or liabilities. The financial statements will reflect the changes in the entity’s capital structure, but acquisition accounting is not applicable to the entity’s separate financial statements.
   
  • The acquired entity continues as the reporting entity (push-down accounting is applied): Under this optional election, the acquiree will continue preparing financial statements; however, its statements will reflect the effect of business combination and the fair valuation of its assets and liabilities on the transaction date. The Deloitte Roadmap Series: Business Combinations explains that “The application of pushdown accounting and the presentation of a new basis of accounting in a subsidiary’s separate financial statements are akin to the termination of an old reporting entity and the creation of a new reporting entity. Therefore, it is not appropriate to combine preacquisition and postacquisition periods in a single set of financial statements. In both the financial statements and any footnote disclosures presented in tabular format, the preacquisition and postacquisition periods are separated by a vertical “black line.” The periods before the acquisition are labeled as the “predecessor” periods and the periods after the acquisition and the application of pushdown accounting are labeled as the “successor” periods.”

It is important for an entity to determine what its future audit requirements are and at what entity level future audits will be required. Additionally, entities should work with the acquirer to determine whether push-down accounting will be applied to the acquiree’s financial statements.

• Evaluating complex debt structures associated with the transaction: Take-private deals are frequently funded with new or modified debt facilities, many of which contain complex structures. Entities must carefully consider who the legal borrower is (refer to reporting entity considerations described above), whether the debt has been amended or modified in conjunction with the transaction, and the accounting implications associated with complex terms. If an existing debt agreement is modified to support the transaction, an entity will need to perform a modification analysis to determine the correct accounting for the modification. Such modification analyses can be complex and judgmental, and are more complex when multiple debt instruments and/or multiple lenders are involved.

• Evaluating Share-Based Compensation Awards: Take-private deals may result in the settlement, cancellation, modification, or rollover of existing share-based payment awards.  Cash payments made to settle outstanding awards should be evaluated to determine whether incremental compensation cost is required to be recorded. Cancelled awards may have their own accounting implications for an acquiree’s financial statements (when push-down accounting is not applied) – Generally, upon the cancellation of a time-based award, any unrecognized compensation cost should be accelerated and recognized on the award cancellation date. For performance-based awards, unrecognized compensation cost should generally be accelerated and recognized as compensation expense if the performance conditions were probable of being achieved prior to the cancellation of the awards.

• Fair Value Adjustments: Companies going private may need to remeasure certain assets and liabilities at fair value and may need to perform impairment tests for goodwill and other intangible assets.

• Deferred Tax Assets and Liabilities: The value of deferred tax assets and liabilities may need to be reassessed based on the company's new ownership structure, including analysis of net operating loss limitations under Internal Revenue Code Section 382.

Conclusion

As the landscape for public companies continues to evolve, the trend of take-private transactions is likely to persist. Understanding the accounting implications of going private is crucial for companies considering this option. By understanding how to navigate these complexities, management teams can focus on the operational challenges that accompany a transaction, rather than the accounting challenges.  

Disclaimer

This article provides general information on the accounting implications of take-private transactions. It is not intended to constitute professional advice. Companies considering a take-private transaction should consult with qualified accounting professionals to address their specific circumstances and ensure compliance with applicable accounting standards. The information provided in this article is based on guidance effective at the time of writing and may be subject to change.

Contributors

Travis Topp and Nick Hernandez