British healthtech scaleup Babylon is having a rocky 2022. It went public on the New York Stock Exchange in a $4.2bn SPAC deal last October but has since seen its share price drop by 90%. Shares are now trading at less than $1 — meaning it could soon get kicked out of the stock market.
And it's not the only publicly listed European tech company to see its valuation fall off a cliff.
SoftBank-backed Swedish comms software company Sinch has seen its share price drop 80% this year. UK-based ecommerce site The Hut Group’s shares have lost more than 60% of their value since the beginning of the year, and Swedish music platform Spotify’s shares have dropped by 50%.
“Some companies may become overly punished [by the wider tech stock crash] so to speak. And as a result [they’re trading] below fair value,” Lars Ingemarsson, Citi's head of Nordic banking, capital markets and advisory, tells Sifted.
This isn't only bad news for shareholders — it also creates risks for the companies, such as bids from private equity firms on the lookout for cheap assets.
Delisting — taking a company private once again — is one way to minimise that risk.
To delist or not to delist
“If the current market conditions persist, I expect we will see a number of growth companies going private,” Ingemarsson says.
Babylon’s shares are, at the time of writing, trading at $0.70 — and have been trading at less than $1 since August 8. Some of the bigger exchanges, like the NYSE, will automatically initiate a delisting if shares trade below $1 for 30 trading days in a row. That means Babylon has until late September to turn the ship around.
It isn’t quite that dramatic though. Babylon is unlikely to end up in a situation where it’s actually kicked off the NYSE. If the company doesn’t start trading above $1 soon, it could do a reverse stock split, which would convert each share into a fraction of a share. That would not change the value of the company — but it would increase the share price.
Yet by the company’s own reckoning it’s also in need of about $200m to make up for a cash shortfall caused by some investors pulling out of the SPAC deal and to hit its revenue target of $1.5bn by 2023. And, although some large shareholders are happy to keep backing Babylon, according to sources close to the business, raising that amount of money would mean diluting the value of shareholder stock by almost 50%, since the valuation of the company has dropped to lower than $300m.
On August 16 Bloomberg reported that Babylon’s owners were considering delisting the company. Babylon has denied any such plans — but perhaps delisting is the best option for the company.
We look into the pros and cons.
Less sharing — more focus on core work as a private company
“The most obvious benefit of going private is you reduce distraction for the management team,” says Ingemarsson.
Publicly traded companies have to disclose a lot more information, comply with a wide range of additional regulatory requirements and be much more transparent than private companies.
Shifting from a public to a private company would let the management team refocus on the core business.
“Whoever owns the company is in total control," Ingemarsson adds. "You don't have to compromise and you can let management just run the business. They don't have to spend time communicating with other investors to sell the equity story and going on roadshows.”
While roadshows mostly take place in the lead-up to an IPO, once publicly listed a company still has to spend lots of time in the limelight. It needs to share quarterly or bi-quarterly earnings reports, invite shareholders to shareholder meetings, give updates on any major changes on voting rights and any information that may be affecting the price of shares. These are things private companies don’t have to do.
Private companies can also dodge media to a much greater extent than public companies. Prior to announcing its IPO, Spotify was famous for shying away from the media; now it has little choice but to engage with them.
Easier to say no to takeover bids
This year, many growth companies have seen their valuations drop below their actual value as investors sell off riskier assets to buy shares in more "stable" sectors instead. This makes tech companies likely targets for private equity firms.
“You become quite vulnerable when you're listed and your share price trades significantly and consistently below fair value,” Ingemarsson says.
A private company’s board of directors can turn down any offer if it's unhappy to sell for whatever reason. That's not the case for listed companies.
“If you’re listed the game changes — suddenly the board has to look after the interests of all shareholders. Even if you're a large shareholder, even a majority shareholder, if you get a bid for the company the board has a fiduciary duty to consider that in the interest of all shareholders.”
This has become a reality for UK cybersecurity company Darktrace, which went public in spring 2021. On August 15, the news broke that the company was in talks with the large private equity firm Thoma Bravo about a possible buyout bid.
Where is it easier to raise money?
One of the advantages of going public is that it should be easier to raise money. However, when there’s a market crunch, money is hard to come by for both listed and private companies.
“If you are trading meaningfully below the fair value of the company, it clearly doesn't make sense to raise equity on the stock market — it's just not economically rational,” says Ingemarsson.
Going private doesn’t automatically mean that money will be easier to come by — or at least not at a high valuation. Fintech giant Klarna saw its valuation crumble by 85% from the valuation it had held for the previous 12 months when raising capital earlier this summer.
However, if a company leaves the stock exchange with deep-pocketed investors, they may be happy to invest further capital in the company and see it grow outside the public market.
How does delisting change the relationship with consumers and employees?
Raising venture capital from top-tier VCs is often a way to raise your company profile — as is going public. To be accepted on a major stock exchange is seen as a stamp of approval and can provide reassurance to customers and suppliers. Being kicked out of the stock exchange can have the opposite effect.
However, choosing to delist doesn’t necessarily give a business a bad rep, says Ingemarsson.
“I’ve rarely seen taking a company private has undermined the confidence in the company.”
One of the advantages of being on the stock exchange is that employee incentive schemes are made easier. New employees can be offered stock grants and public stock option plans, and existing employees can finally exercise their stock options. When companies delist, they once again have to decide what kind of option schemes they want to offer their employees.
“Taking the company private does reduce flexibility when it comes to employee retention schemes and incentive schemes,” says Ingemarsson.
Employees and other shareholders will retain their equity in a delisted stock even if they cannot sell their stake as easily anymore.
Is there a cost of delisting?
It’s not free to list — or delist (although that, at least, is cheaper). And, once listed, companies need to invest in investor relations teams as well as regulatory requirements associated with being a public company.
“These are relatively small amounts, but I think the big cost is the time that the CEO and the CFO and other [members of the] management [team] spend communicating with investors instead of running a company. That is hard to quantify but it is a significant cost,” Ingemarsson says.
