Going Private

Updated on April 5, 2024
Article byPrakhar Gajendrakar
Edited byPrakhar Gajendrakar
Reviewed byDheeraj Vaidya, CFA, FRM

Going Private Meaning

Going Private refers to the process of a public company becoming a private entity. In this setup, a company restricts its shareholders from taking trades in the open market. This provision of turning the ownership gives companies a chance to restructure themselves and improve their operational aspects as required.

Going Private

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Going private is achieved through different types of methods and has its benefits. Long-term goals and objectives are one of the critical reasons for a public company going private. It is the opposite of going public, where companies list their shares on stock exchanges and launch an initial public offering (IPO).

Key Takeaways

  • Going private is when a publicly listed company becomes private and delists its share from the stock exchange.
  •  It is the opposite of going public and is done through several methods like the tender offer, management buyout, or private equity buyouts.
  • When a company decides to go public, they launch an IPO. The reverse of it is going private.
  • When a public company becomes private, the retail investors’ shares are bought at a premium price from them.

Going Private Explained

Going private is when an investor or small group of investors buy a public company’s outstanding shares and, therefore, turn the ownership. Once going private, the company shares are no longer listed on the stock exchange, and public investors cannot trade it in the open market. A company going private can have multiple reasons for it. It can be a forced delisting when the business is no longer in compliance with the stock exchange listing requirements or receives a penalty. If the company wants to change its focus on long-term objectives, given the shares are trading at a meager price and are not offering any benefits to the business, going private is a good option.

Going private transactions occur in mainly three different methods –

  1. Tender offer: In a tender offer, the acquiring entity or individual makes an offer directly to the shareholders of the target company, proposing to purchase their shares, often at a premium to the current market price. If a sufficient number of shareholders accept the offer, the acquirer can gain control of the company.
  2. Private equity buyout: The buyer purchases the controlling stake of the company they are interested in buying. It is mainly done through heavy debt and refinancing, but if the purchaser has cash or funds ready, it can be done through different methods. A private equity firm mostly authorizes the acquisition, and the purchase may use the buying company’s assets as collateral.
  3. Management buyout: In this scenario, the company’s management decides to buy the outstanding shares to turn the company private; once bought, they can make essential and confidential decisions. The positive side of such transactions is that the buyers are internal and are already part of the business. Therefore, they are more knowledgeable and understanding of the company’s prospects, operations, and growth.

Examples

Let’s understand the concept with the help of some examples.

Example #1

Suppose a motor company that is publicly listed on the stock exchange. Jacob, a significant stakeholder in the business, is also a member of the management team. Recognizing the company’s potential for substantial growth in the future, Jacob decides to lead an initiative to take the company private. His plan involves buying out the company’s shares from both the management and other shareholders.

Jacob proposes this buyout to the management team, who agree to sell their shares at a premium price based on the current market value of the company’s publicly traded shares. The method of financing this buyout is dependent on Jacob’s resources. He could finance the buyout through a loan, often termed a leveraged buyout, or he could use his funds to make an all-cash offer.

Once he successfully acquires a controlling interest in the company, meeting all legal and regulatory requirements, the company can then be delisted from the stock exchange, resulting in its transition from a public to a private entity.

Example #2

Toshiba, the Japanese multinational conglomerate, declared that it is considering strategic options amid challenges with its activist shareholder base. The company has received eight initial proposals for going private and two proposals for capital alliances that would allow it to remain listed. Toshiba’s chief executive, Taro Shimada, expressed encouragement over the interest shown in the company’s potential.

The corporation, which has faced accounting and governance crises since 2015, set up a special committee to solicit these proposals after shareholders voted down a management-backed restructuring plan. Toshiba plans to evaluate the financing arrangements and feasibility of these proposals. 

Benefits

Going private has its own set of advantages that it brings to the companies opting for it. Some of them are as follows:

  1. The share distribution is limited, and the control resides in a limited pool.
  2. It is accessible for decision-making and formulating policies and business operations.
  3. Once private, the company is not answerable to other public disclosures and takes more confidential decisions for business matters.
  4. The company is no longer involved in stock market quarterly results hindrances and effects.
  5. There is a high potential to use the capital structure with tax benefits.
  6. It enables compliance and reporting with reduced costs and time.
  7. The deals are closed faster, and the process becomes more efficient and less risky.
  8. In private companies, the buyer with the maximum shares has more accessible access to capital.
  9. Apart from the general regulations, there is less government intervention and monitoring.

Frequently Asked Questions

1. What happens to shareholders in a going-private transaction?

In a going-private transaction, shareholders of the public company typically receive compensation for their shares, often at a value higher than the current market price. After the buyout, these shareholders no longer own a part of the company as it transitions from public to private ownership. The exact terms of compensation depend on the specific deal structure and negotiations.

2. What are the disadvantages of going private?

The disadvantages of going private are –
• A shareholder cannot trade their shares in the stock market.
• Public investors cannot buy or make investments in private companies through the exchange.
• Once private, the company has to seek new ways to raise capital and may take loans.

3. Can a private company go public again?

Yes, a private company can transition back to being public through an Initial Public Offering (IPO). This process involves meeting specific regulatory requirements, preparing extensive financial disclosures, and often working with investment banks to facilitate the transition. The company’s shares are then listed on a stock exchange, allowing public investment.

This article has been a guide to Going Private and its meaning. Here, we explain the concept in detail along with its benefits and examples. You may also find some useful articles here –

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