The news of a private company going public through an initial public offering (IPO) is a commonly known practice. Less known is the reverse, in cases when a public company decides to become a private company again.
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Interestingly, the years 2020 and 2021 witnessed a boom in IPO listings but a few of them decided to go private again in 2023, by selling themselves to private equity firms. Rising interest rates, underperformances by several major companies, and the drying up IPO market are all factors that add to the possibility of more private deals going ahead.
Company Turning Private – Shareholder Benefits
Just as there are benefits for shareholders when a company’s shares are trading publicly, shareholders of a public company also benefit when the company goes private. Most importantly, any public company going private will have to buy back a large number of shares of the company from the market. This is usually done by paying a premium over the current trading price of the stock, thus benefiting shareholders. If shareholders believe that enough premium is not offered for their shares, they can refuse to sell their shares unless a good price is agreed upon.
Once a company goes private again, its shares will be delisted from the stock exchange and investors will no longer be able to buy or sell shares of the particular company. At the same time, one of the biggest advantages of a company becoming private again is an exemption from the regulatory listing rules and accounting procedures. A publicly traded company in the U.S. has to comply with the stringent accounting rules laid down by the Securities and Exchange Commission (SEC), but a private company has no such requirement.
There are multiple ways through which a public company can become private. Below, we discuss a few of them in detail.
# Private Equity Buyout
One of the common ways of going private is through purchase by private equity investors. Usually, a group of private investors or private equity firms who believe in the long-term value of the company will seek to buy it out and take it private. In such transactions, the private equity firm will buy all or most of the outstanding stock of the company by paying a premium to shareholders. The remaining shares will be delisted.
One of the best and most recent examples of such a transaction is the buying out of the social media company, Twitter, which was purchased by billionaire Elon Musk. Each shareholder got a hefty premium for the deal and was paid $54.20 per share in the exchange.
# Corporate Buybacks
Companies can also go private by buying back all of their shares from the market. If a company feels that its shares are currently undervalued and have the potential to grow significantly in the coming years, it may resort to corporate buybacks and delist the company. After a few years, the company can again go for an IPO with a fresh listing price.
# Mergers & Acquisitions (M&A)
M&A are the most widely popular form of going private. In this, one company buys all the shares of the second company and either forms a new combined entity or becomes the surviving entity.
Ending Thoughts
When a public company goes private, it’s almost always done by paying the shareholders a premium price for each share. This sometimes poses a good opportunity for an investor to make money. However, it is difficult to gauge when a company can become a takeover candidate or when a company may go private.
An investor who wants to make money from companies going private can keep a watch on publicly traded companies performing poorly but with high future potential. They can also look for companies that are currently undervalued, or trade below their IPO listing price, and companies in which activist investors take substantial stakes. All of these are prospective companies that may become private.
