Hiding in Plain Sight: The Search for Take-Private Opportunities

The emergence of interest in take-private deals reflects larger forces at play in M&A, says Justin W. Steil, partner and head of the transactions team at MiddleGround Capital, a Lexington, Kentucky-based private equity firm, which in June invested in L.S. Starrett Company, a Massachusetts-based publicly listed tool manufacturer that was founded in 1880 and incorporated in 1929.

“You are seeing the slowdown in M&A translate to fewer private equity exits,” Steil says. “In the absence of private equity firms bringing their portfolio companies to market, firms like ours are working to be more creative in finding new investment targets, such as publicly traded businesses, to maintain deployment.”

Every buyer needs a seller, and other factors, including limited access to capital and the slump in the share price of special purpose acquisition companies (SPACs), are also prompting some public companies to mull going private. In early 2022-2023, SPACS saw a 93.2% drop in funding from a peak of $250 billion in deals reported in 2020-2021, according to the Michigan Journal of Economics.

“A lot of businesses don’t necessarily have the cash or the capital structure to execute their business plans,” Steil says. “They were depending on continued access to public markets.”

High interest rates are another force motivating take-private deals.

“All companies are struggling with high interest rates and the public ones are doing it in the limelight,” says Markus Bolsinger, co-head of the private equity practice for Dechert. “If you have an investor that’s coming in to take your company private and right-side your balance sheet, I think that’s attractive to the management team.”

All companies are struggling with high interest rates and the public ones are doing it in the limelight.

Markus Bolsinger

Dechert

Leaving the Limelight

The bureaucratic stresses of being a public company are yet another driver of take-private deals.

Companies are asking themselves, “Why should I live quarter to quarter, when I could be private and really focus on running the business the way I think it should be run?” says Christina Bresani, managing director and head of corporate advisory for investment bank William Blair.

She says the take-private momentum has been going on for the last 12 to 18 months.

“Public companies, management teams and boards are frustrated with being public,” she says. “They’ve seen their share prices dip and not recover as they’d like them to, despite improved operating performance.”

Rising costs associated with being a public company are another concern. “Being public is not cheap,” says Bolsinger. “There are a lot of costs that go along with it with respect to compliance and disclosure obligations and so forth. Not every company is meant to be in the public market.”

Doug Starrett, CEO of L.S. Starrett Company, says the stock price was one reason why the company decided to go private.

“[We] were undervalued by the public markets for many years, which was not reflective of our performance,” Starrett says. “This was harmful to all of our stakeholders.”

Red tape was another reason.

“Exploding government regulations and SEC reporting made it onerous for small public companies like Starrett to survive,” the CEO adds.

In a transaction that closed in June, MiddleGround acquired the company, which makes more than 5,000 variations of precision tools, gages, measuring instruments and saw blades for industrial, professional and consumer markets worldwide. The all-cash transaction was struck at $16.19 per share, which MiddleGround noted was a 63% premium to the closing stock price on March 8, the last trading day prior to the announcement. On March 13, Starrett was trading at $15.77 and had a market capitalization of $109.7 million.

Other take-private deals  in 2024 include private equity firm CORE Industrial Partners’ acquisition in June of Fathom Digital Manufacturing Corp., a provider of on-demand digital manufacturing services. In March, Mdf Commerce Inc., a SaaS company that implements digital commerce technologies, agreed to be acquired by KKR. In the all-cash transaction, Mdf shareholders receive $5.80 in Canadian dollars per share, equating to about $255 million in total equity value, and a 58% premium on Mdf’s Toronto Stock Exchange closing price of $3.68 on March 8.

While interest in take-privates is rising, Bolsinger says the deals don’t happen overnight, and many don’t cross the finish line.

“You may work on 10 deals and, if you are lucky, you may close one,” he says.

There are many reasons why a take-private deal doesn’t close. They could include valuation disagreements, concentrated stockholders who are not interested in selling, a target that’s in the middle of implementing a strategic plan and findings in the non-public material that are not attractive to the potential buyer.

News that a take-private deal is being considered is another risk to closing a deal.

“You look at a company and there is leak that someone is looking at taking that company private, and the stock price shoots up, and all of a sudden the premium you planned to offer is gone,” Bolsinger says.

Considerations for Going Private

Laying the groundwork for a take-private deal can be a slow process. MiddleGround’s Steil says his firm had sought over years to build a relationship with Starrett, long before the transaction became a reality.

“Starrett is a company we’ve been tracking for some time,” he says. “We have a public markets tracker where we watch the universe of companies and see how they are trading and look to identify attractive opportunities.”

MiddleGround sent a letter to Starrett in 2020 pointing out the benefits of going private.

“We did not get a response then, but in 2023 they came to the same conclusions we had about the benefits of being a private company,” Steil says. “When we visited, they actually held up our letter in the air.”

The letter was the first step in building a rapport with CEO Starrett, according to Steil, who he says eventually saw that MiddleGround was credible and had a lasting interest in the company.

Starrett says his company used a variety of advisors to help navigate becoming a private company. Lincoln International served as financial advisor and Ropes & Gray served as legal counsel to Starrett. William Blair advised MiddleGround in connection with the acquisition and debt financing of Starrett, and Dechert served as legal counsel to MiddleGround.

For other public companies considering going private, Starrett’s advice is to “clearly understand why you want to pursue the option and carefully weigh the risks and rewards.”

Starrett says his company chose MiddleGround for its “operational expertise, understanding of the value of the brand and returning fair value to all our stakeholders.”

Looking to the future, Steil says MiddleGround wants to ensure that Starrett, which has been around for 140 years, will thrive.

“We feel we can work with the management team to accelerate revenue growth through product extensions and that we can leverage our deep operational expertise to help them improve the efficiencies of their existing facilities,” he says.

Annemarie Mannion is a former reporter for the Chicago Tribune and a freelance writer who covers business.