A private company typically goes public by conducting an initial public offering (IPO) for its shares. However, the reverse may also occur. A public company can transition to private ownership when a buyer acquires the majority of it shares. Shareholders have to agree to the sale. Those that do typically sell their shares at a premium over the current market price as compensation for giving up ownership in the company.
This public-to-private transaction results in the de-listing of the company's shares from a public stock exchange. Shares are no longer available to the public-at-large. While companies may be privatized for a number of reasons, this event often occurs when a company is substantially undervalued in the public market.
Key Takeaways
- In a public-to-private deal, shareholders approve an offer from investors for their shares.
- Investors offer a premium above the current market price as inducement to shareholders to give up ownership in the company.
- Once private, a company's shares can no longer be traded publicly because the company is de-listed from the public exchange on which its shares once traded.
- Going private is an easier process than going public due to fewer steps and regulatory hurdles.
- Typically, a company seen as undervalued in the market will opt to go private, although there can be other reasons such an action is taken.
What Is Privatization?
The term privatization refers to the action of changing a publicly owned company into a privately held company. Public companies are listed on major stock exchanges. Their stock is traded publicly and can be bought and sold by any investor.
A company that goes from public to private is de-listed from the public exchange on which its shares traded. It still may issue stock but its shares will no longer be available to the public.
In addition, privatization means that a company will no longer be answerable to public shareholders or regulated as closely by the government.
How Does Privatization Work?
Taking a public company private is relatively straightforward and typically involves fewer regulatory hurdles than private-to-public transitions.
A private group will tender an offer for a company's shares and stipulate the price it is willing to pay. Typically, it's a premium over the current market price. If a majority of voting shareholders accept, the bidder pays the consenting shareholders the purchase price for every share they own.
For example, if a shareholder owns 100 shares and the buyer offers $26 per share, the shareholder receives $2,600 for relinquishing their position and ownership in the company. This situation often favors shareholders due to the aforementioned premium.
Many famous public companies have gone private and de-listed their shares from a major stock exchange. They include Dell, Panera Bread, Hilton Worldwide Holdings, H.J. Heinz, and Burger King. Some companies go private, only to return to the market as public companies with another IPO.
Privatization can be a nice boon to current public shareholders, as the investors taking the firm private will typically offer a premium over the share price's current market value.
Interestin Privatization
In some cases, the leadership of a public company will proactively attempt to take a company private. Tesla (TSLA) is one example of a company that flirted with the possibility. Ultimately, it remained public. On August 7, 2018, founder and CEO ElonMusk tweeted he was considering taking TSLA private and had secured funding at $420 per share.
After his announcement, Tesla closed up 6.42% and trading was halted following the ensuing news frenzy. The Securities and Exchange Commission (SEC) filed a civil complaint against Musk. The unabashed CEO justified his intentions with the following message:
As a public company, we are subject to wild swings in our stock price that can be a major distraction for everyone working at Tesla, all of whom are shareholders. Being public also subjects us to the quarterly earnings cycle that puts enormous pressure on Tesla to make decisions that may be right for a given quarter, but not necessarily right for the long term.
Contingency Plan
In a public to private deal, the premium that investors are willing to offer shareholders for their shares is usually contingent on the investors buying a certain number of those shares (normally, an amount that gives them control of the company). If that condition isn't met, the offer is withdrawn.
What Happens to Shares When a Company Goes Private?
When a publicly traded company becomes a privately held company, the public company's shares are purchased at a premium by the investors buying the company. The company is delisted from the stock exchange where its shares formerly traded. Shares now can no longer be traded publicly.
What Happens to Shareholders When a Company Goes Private?
Shareholders agree to accept the offer to be bought out by investors. They give up ownership in the company in exchange for a premium price for each share that they own. They can no longer buy shares in the company through a broker.
What Happens to Private Shares When a Company Goes Public?
When a private company goes public, for instance, through an initial public offering (IPO), private shares owned before the IPO may gain in value. However, they usually cannot be sold for a specific amount of time, starting on the day of the IPO. This period is known as the lockup period and may last 180 days.
The Bottom Line
Shareholders can make out well financially when a public company goes private. In 2005, Toys "R" Us famously went private when private equity groups paid $26.75 per share to the company's shareholders. This price was more than double the stock's $12.02 closing price on the New York Stock Exchange in January 2004.
So, while they may no longer have ownership in a company that goes private, shareholders are often well-compensated for relinquishing their shares.
FAQs
If shareholders approve a tender offer to take a public company private, they'll each receive a payment for the number of shares that they're giving up. Typically, private investors pay a premium that exceeds the current share price and shareholders receive that money in exchange for giving up ownership in the company.
How does privatization affect shareholders? ›
What Happens to Shareholders When a Company Goes Private? Shareholders agree to accept the offer to be bought out by investors. They give up ownership in the company in exchange for a premium price for each share that they own. They can no longer buy shares in the company through a broker.
What happens to shareholders of a company when they go private? ›
Once a company goes private, its shareholders are no longer able to trade their shares in the open market. There are several types of going private transactions, including private equity buyouts, management buyouts, and tender offers.
How does ownership change through privatization? ›
Shareholders first must agree to give up ownership in the company in exchange for some amount of money. If approved, all shareholders will receive a certain amount per share, often at a premium to the market price. Afterward, they are no longer shareholders and the company's shares would be de-listed from exchanges.
What happens to shareholders when a private company goes public? ›
When a company goes public, the previously owned private share ownership converts to public ownership, and the existing private shareholders' shares become worth the public trading price. Share underwriting can also include special provisions for private to public share ownership.
What are the negative effects of privatization? ›
As a few private enterprises may control the market, privatization might result in the establishment of oligopolies or monopolies in some industries. This may hinder competition, restrict customer options, and trigger unfair business practices.
What are the disadvantages of privatization? ›
The disadvantages of privatization are:
- A more important chance for misrepresentation and debasem*nt to happen.
- Greater expenses for customers.
- Firmness because of long-haul contracts.
- Profit is an essential inspiration.
When a private company makes a profit, what it does with that money is their choice. This profit is also known as a distributable surplus. They can choose to retain the money to reinvest into the business, or they can pay it out to their shareholders in return for their investment. This payment is known as a dividend.
Can a shareholder be removed from a private company? ›
There are legal means to remove a shareholder, and the method to do so depends on both the bylaws of the business entity and the firm's shareholders' agreement. If there is no shareholders' agreement, involuntary removal is still possible but more difficult.
How do private companies pay shareholders? ›
Part of the returns for investors in private equity is through receiving dividends, much like shareholders of a public company do. This process is known as dividend recapitalization and involves the process of raising debt to pay private equity shareholders a dividend.
Advantages & Disadvantages
| Advantages | Disadvantages |
|---|
| Resources are efficiently used | Private players may enter the market, establishing monopoly |
| Facilitates healthy competition | Less transparent |
| Risk-sharing with government | Higher cost to consumers |
| No political influence | |
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For example, privatization covers the sale of public assets to private owners, the simple cessation of government programs, the contracting out of services formerly provided by state organizations to private producers, and the entry by private producers into markets that were formerly public monopolies.
What is the difference between public ownership and privatization? ›
Key Takeaways. A private company usually is owned by its founders, management, and/or a group of private investors. Information about its operations and financial performance is not available to the public. A public company has sold a portion of itself to the public via an initial public offering.
Do shareholders make money when a company goes public? ›
Since the shareholders don't get a piece of the profits, the only way to make money on the stock is to buy low and sell high (or buy low and hold for awhile, perhaps until retirement, and then sell, however you want to look at it).
Do shareholders own a company? ›
A shareholder is a person, company, or institution that owns at least one share of a company's stock or in a mutual fund. Shareholders essentially own the company, which comes with certain rights and responsibilities. This type of ownership allows them to reap the benefits of a business's success.
What happens when a private company is acquired by a public company? ›
The shareholders of the private company usually receive large amounts of ownership in the public company and control of its board of directors. Once this is complete, the private and public companies merge into one publicly traded company.
How do private shareholders get paid? ›
The first is through an increase in the value of the stock that they own: as the company's value increases, so does the shareholder's stock value. The second way is through dividend payments, or distributions of a company's profits. Depending on the type of stock, a dividend might or might not be payable.
What are the effects of privatization policy? ›
Privatization should not reduce consumption, because, unlike taxation, it does not reduce private sector wealth. Indeed, it may even increase it. As for its impact on investment, the analysis suggests that in certain cases, like the poorly run airline example, privatization can actually reduce invest- ment.
How can shareholders affect a company? ›
Shareholders vote on by-laws, the number of members of the board and the sale of company assets and can add restrictions on the types of business engaged in by a corporation.
What happens when a company is bought by a private equity firm? ›
A company is bought out by a private equity firm, and the purchase is financed through debt, which is collateralized by the target's operations and assets. The PE firm buys the target company with funds from using the target as a sort of collateral.
