What’s it: Going private is when a company’s stock is no longer traded for the public. It is the opposite of going public, i.e., a company lists its shares on a stock exchange for trading by the public. And, when it is listed on the stock exchange, we call it a public company.
On the other hand, going private causes public companies to become private companies (closed companies). It may be because the company bought back all of its outstanding shares. Or, a private company acquires it and buys most of the shares. The stock exchange then delisted the shares and can no longer be traded on the open market.
Reasons for going private
Force delisting. The company no longer meets the requirements for listing on the stock exchange, for example, because it was liquidated or received a prolonged penalty without showing any intention of improvement.
Focusing strategy. By going private, companies can focus on long-term goals and objectives.
Public companies often have to meet or exceed the short-term expectations of stock investors and analysts. Failure to meet expectations causes a large drop in their share price. Finally, they should focus more on short-term performance than on long-term goals.
Too-low share price. A company usually goes private when the market price of its shares is substantially below its book value. At the same time, private acquirers may see the company as having strategic resources for them. Therefore, the low share price allows them to acquire the company at a low price.
No benefit. Listed shares on the stock exchange do not provide benefits to the company. Indeed, in the beginning, they were able to raise funds at the initial offering.
However, when their share price fell, the market capitalization also fell. Investors are less interested in small-cap stocks. It makes trading in the company’s stock illiquid.
Finally, when companies need capital, they cannot raise funds optimally through the right issues because of low prices. Also, investors may not be interested in the company’s new shares.
Go private methods
There are several ways to run go private, including:
- Private equity buyouts
- Management buyout
- Tender offer
Private equity buyouts
The acquirer takes over the controlling stake in the target company. To finance acquisitions, they may rely on debt.
They acquired it because the target company has strategic assets that can be synergized with its assets.
Then, the acquirer restructures the target company and makes it more competitive with the acquirer’s support. If successful, the target company can generate sufficient cash flow to pay back the debt.
Usually, the acquirer is a private equity firm. They usually pawn the target company’s assets as collateral to get the debt to finance the acquisition.
In this case, the target company’s management buys the stock from the public and makes it private ownership. Similar to private equity purchases, management usually relies on debt to finance acquisitions.
The positive side of this acquisition is that the acquirer comes from internal. These are people who are familiar with the target company’s business. They understand performance, prospects, and how to restructure the company to be competitive.
Under a tender offer, a company makes a public offer to buy back most or all of the company’s shares. To finance purchases, the acquirer might use a mixture of cash and stock. For example, Company X makes a tender offer to Company Z. In this case, Company Z’s shareholders will receive 80% in cash and 20% in Company X’s shares.
Benefits of going private
First, short-term expectations no longer interfere with the company in developing a strategy. It doesn’t have to spend a lot of time and resources just to secure its share price.
For example, a public company might pay dividends regularly to please investors. By going private, they may not have to do it regularly. That way, they can increase long-term capital by increasing retained earnings. They can invest it to make more money in the future.
Second, the company saves resources. Companies incur some costs for regulatory compliance, compliance, and reporting. They have to pay the costs of accounting, auditing, internal control, consultants to produce periodic reports, quarterly and annually.
Third, sensitive information can be more secure. Public companies must apply the principle of information disclosure. They announce their operational and financial performance through annual, quarterly reports or public presentations. Competitors can use this sensitive information to find weak points and destroy them.