Going Private — a transaction that makes a publicly traded company a private one. After this, the previous owners can’t trade the shares. Usually, this situation happens when the company has too many debts and is unable to fulfill its obligations. The money from the sale is used to pay for them.
What Is Going Private
The publicly traded company goes private when the investors buy its shares. Then, they implement changes in the corporate charter. There are several ways of going private. The first way is to let the private equity firm purchase the controlling share. It is called the private equity buyout. Then, the company pays the debts using the money from a business.
There are various types of private businesses: sole proprietorship, limited liability companies, trade unions, corporations (S-corps and C-corps), trade associations, and partnerships. They all have different structures and ways of functioning. C-corps are regulated under IRS rules. S-corps are regulated under special rules.
The second way of going private is the management buyout. In this case, the company’s management buys the shares and pays the debts. This method is quite successful because the management has insider information concerning the state of the company and knows how to solve the problem.
The third way is the tender offer. The company offers third parties to buy it. After the purchase, the third party pays the debts. If the management doesn’t want to go private, this process is called a hostile takeover.
The process of going private has its pluses and minuses. The companies should decide on an individual basis whether they need to do this.
Pros of going private:
- Less reporting. The publicly traded company has a much higher degree of disclosure.
- More privacy. The owners of publicly traded companies should disclose more information about their income.
- More time for management. The publicly traded companies require too much time for running the business.
- More control. In private companies, the management has more control over the business.
Cons of going private:
- More opportunities to make money. The stocks of public companies are more liquid, so they can raise capital more quickly.
- Investment attractiveness. Public companies are perceived as more stable ones.
- Work commitment. The publicly traded companies use the stocks for compensation and recruitment of high-quality staff.
- Public attention. Public companies receive more attention from the media.
During the process of going private, the company should consider numerous factors like corporate issues, third-party consent and approvals, and the acquirer’s need for financing. If the third party wants to change something in the agreement, the process of going private may delay.
Process of Going Private
If the company plans to go private, it should pass several stages. It is necessary to avoid the problem with the legislation and taxes. That’s why this process should be started as soon as possible, it may be quite long.
Stages of going private:
- Creating an arrangement. This document should clarify the actions of the old and new management. The arrangement should consider the interests of both parties.
- Reverse stock split. A reverse split is a reduction in the number of shares of the issuer circulating on the stock exchange due to the consolidation of the initial number of shares. Capitalization in this case remains unchanged, and the number of securities of the shareholder and the value of the share increases under the consolidation ratio. A reverse split is a non-market way to increase the price of a stock. It is resorted, if it is impossible to quickly increase the price using exchange methods or if these methods turn out to be much more expensive than the procedure for reregistration the issue of shares.
- Delisting. Delisting is the exclusion of securities of a certain issuer from the quotation list of the stock exchange. After delisting, the securities of the issuing company can’t be traded on the exchange where the company is excluded from the quotation list. Delisting can be initiated by the issuing company itself or by the commission of the exchange. Some of the most common reasons are the bankruptcy or reorganization of the company, violation of the terms of placement on the exchange, non-compliance of assets with exchange requirements, or the aspiration of the company's management to take it private.
- Dutch auction tender offer. During this auction, the highest price for the goods sold is first announced, and then the rates are reduced to the one that the first buyer agrees to, to whom the goods are sold. First, the auctioneer assigns the maximum price, which lights up on the scoreboard installed in the auction room. If none of the buyers wants to purchase a lot at this price, then the auctioneer begins to reduce it. The buyer is the one who first presses the button, which stops the price change on the scoreboard. After that, the number under which this buyer is registered with the organizers of the auction lights up. They are considered the buyer of this lot.