What Is Going Private?
Going private refers to the process by which a publicly traded company converts to private ownership, typically through buying back its outstanding shares from public shareholders. This strategic move falls under the broader umbrella of Corporate Finance. When a company goes private, its shares are no longer listed on a public stock exchange, and it ceases to be subject to the reporting and regulatory requirements imposed on Public Company entities. The decision to go private often involves a significant shift in the company's Capital Structure, frequently involving substantial debt.
History and Origin
The concept of taking a company private, particularly through leveraged buyouts (LBOs), gained significant prominence in the 1980s. This era saw a surge in such transactions, driven by the availability of financing and a growing appetite for private control. Pioneering Private Equity firms like Kohlberg Kravis Roberts (KKR) played a crucial role in popularizing these deals. One notable example from this period was the 1984 acquisition of the Gibson greeting-card company by a group of investors who put up a small amount of their own money and borrowed a large sum, later selling the company's stock back to the public for a substantial profit.10 This period marked the beginning of a trend where businesses sought to escape short-term market pressures and hostile takeover attempts by moving into private hands.9 The landscape of going private transactions has continued to evolve, with a notable resurgence in recent decades, including an increase in "public-to-private" transactions led by private equity firms or investor groups.8
Key Takeaways
- Going private is the process of a publicly traded company transitioning to private ownership.
- The primary methods include leveraged buyouts (LBOs), management buyouts (MBOs), tender offers, and mergers.
- Companies often go private to reduce regulatory burdens, avoid public scrutiny, or facilitate long-term strategic changes.
- Such transactions typically involve a significant outlay of capital, often from private equity firms, to acquire outstanding shares.
- Shareholders receive cash or other consideration for their shares, losing the liquidity of publicly traded stock.
Interpreting the Going Private Process
When a company goes private, it signals a strategic shift from being accountable to a broad base of public shareholders to a more concentrated ownership structure, often involving a select group of investors or the existing management team. This transition implies a desire for greater operational flexibility and the ability to implement significant changes without the constant scrutiny of quarterly earnings reports or the fluctuating sentiment of the stock market. The terms of the deal, including the per-share price offered to Shareholders, are crucial indicators of the perceived value and future potential of the Private Company. A successful going private transaction typically requires careful Valuation and often involves a premium over the pre-announcement trading price to incentivize existing shareholders to sell.
Hypothetical Example
Imagine "TechSolutions Inc.," a publicly traded software company that has been struggling with short-term market pressures despite having promising long-term projects. Its stock price, currently at $25 per share, doesn't reflect the management's vision for a multi-year research and development initiative.
A Private Equity firm, "Horizon Capital," sees this undervaluation and believes that with strategic restructuring and a longer investment horizon, TechSolutions can unlock significant value. Horizon Capital proposes a deal to take TechSolutions private.
- Offer: Horizon Capital offers to buy all outstanding shares of TechSolutions for $35 per share, representing a 40% premium to the current market price. This offer entices many existing shareholders.
- Financing: Horizon Capital secures a significant portion of the acquisition cost through debt, making it a Leveraged Buyout (LBO)). They also contribute a portion of their own equity.
- Shareholder Vote: TechSolutions' board of directors, after reviewing the offer and consulting with financial advisors, recommends the deal to shareholders. A special committee ensures the transaction is fair to unaffiliated shareholders.7
- Completion: Once the required majority of shareholders approve the Tender Offer and the necessary regulatory approvals are obtained, TechSolutions' shares are delisted from the stock exchange.
- Post-Privatization: As a private entity, TechSolutions can now focus on its long-term R&D without worrying about quarterly earnings expectations, allowing it to invest heavily in its innovative projects.
Practical Applications
Going private transactions appear in various contexts across financial markets and corporate strategy. One common application is enabling significant operational overhauls or restructurings that would be difficult to implement under public scrutiny. For instance, a company might go private to streamline operations, divest non-core assets, or make substantial investments in new technologies without the pressure of immediate Return on Investment (ROI)) expectations from public markets.
Private Equity firms frequently initiate these transactions, viewing undervalued public companies as opportunities for value creation. They can acquire a company, make necessary changes, and then potentially re-list the company on a stock exchange through an Initial Public Offering (IPO)) years later, aiming to realize substantial profits. Another practical application can be seen in situations where a company's management team, often supported by private equity, seeks to gain greater control and ownership through a Management Buyout (MBO)).
The regulatory landscape plays a significant role in going private transactions. In the United States, the Securities and Exchange Commission (SEC) has specific rules, such as Rule 13e-3, that require detailed disclosures to protect shareholders in these transactions. This rule ensures that companies provide comprehensive information to shareholders about the purposes, alternatives, and fairness of the transaction.65
Limitations and Criticisms
While going private offers several advantages, it also carries inherent limitations and criticisms. A primary concern for public shareholders is the loss of Liquidity, as their shares can no longer be easily bought or sold on an open exchange. The price offered in a going private transaction might also be a point of contention, with some shareholders arguing that the offer undervalues their shares, particularly if the company has significant long-term potential. This can lead to litigation, especially in states like Delaware, which have a substantial body of case law governing conflict-of-interest transactions.4
From the perspective of the company going private, one major drawback is the loss of easy access to public capital markets for future funding needs. As a private entity, the company must rely on private funding sources, such as debt from banks or additional equity injections from its new owners. Furthermore, private equity involvement, while offering capital and expertise, can come with its own set of challenges. Firms often impose aggressive growth targets and tight timelines, which can create pressure on management to deliver rapid results, potentially at the expense of long-term sustainability or employee development.3 Concerns about the long-term illiquidity of private equity investments, a lack of transparency, and the absence of clear price discovery are also valid criticisms often associated with the private markets.2
Going Private vs. Going Public
Going private and Going Public represent opposite ends of a company's ownership spectrum, each with distinct implications for financing, regulation, and strategic management.
| Feature | Going Private | Going Public |
|---|---|---|
| Ownership Structure | Concentrated, typically by a small group of investors or a single entity. | Dispersed among numerous public shareholders. |
| Access to Capital | Relies on private financing (e.g., private equity, debt). | Accesses capital through public stock offerings. |
| Regulatory Burden | Significantly reduced reporting and compliance requirements (e.g., no longer subject to SEC filings like 10-K, 10-Q). | Subject to extensive SEC regulations and financial reporting. |
| Public Scrutiny | Minimal; operations and financials are private. | High; constant market scrutiny, analyst coverage. |
| Liquidity of Shares | Low; shares are not publicly traded. | High; shares can be bought and sold on exchanges. |
| Decision-Making | More flexible and long-term focused, away from quarterly pressures. | Often influenced by short-term market expectations. |
The primary confusion between the two often stems from viewing them as merely transactional events rather than fundamental shifts in a company's strategic orientation and its relationship with capital markets. Going private typically aims to escape the burdens of public ownership, while going public seeks to leverage the benefits of widespread capital access and increased visibility.
FAQs
Why do companies go private?
Companies choose to go private for various reasons, including reducing costly and time-consuming regulatory compliance burdens, avoiding public scrutiny of their financial performance and strategic decisions, and gaining greater control to implement long-term strategies without market pressure. It can also be a defensive measure against hostile takeovers or to allow for significant restructuring or turnaround efforts.
How do companies go private?
A company typically goes private through a transaction where an individual, a group of investors (often a Private Equity firm), or the company's existing management team purchases all outstanding public shares. Common methods include a Leveraged Buyout (LBO)), where a large amount of borrowed money is used for the acquisition; a management buyout (MBO), where the existing management buys the company; a Tender Offer to shareholders; or a reverse Merger.
What happens to shareholders when a company goes private?
When a company goes private, public shareholders are typically offered a cash payment or other consideration for their shares. Once the transaction is complete and the company Delisting occurs, their shares are no longer traded on a public exchange, and they lose the ability to easily buy or sell their stake. They receive a payout for their ownership interest, but they no longer participate in the company's future growth as public shareholders.
Are there regulations governing going private transactions?
Yes, in the United States, going private transactions are heavily regulated by the Securities and Exchange Commission (SEC) under Rule 13e-3 of the Securities Exchange Act of 1934. These regulations require extensive disclosures to shareholders, ensuring transparency regarding the transaction's fairness, purpose, and potential conflicts of interest. The goal is to protect unaffiliated shareholders from potentially unfair deals.1
Can a private company become public again?
Yes, a company that has gone private can certainly become public again. This often happens after the new private owners have implemented operational improvements, streamlined the business, or grown its value significantly. The process of becoming public again is called an Initial Public Offering (IPO)), where the company sells its shares to the public once more on a stock exchange.