Overview of Going Private
Going private refers to a corporate transaction in which a publicly-traded company de-lists from a stock market and goes private. This means that a publicly-traded company’s ownership is moved from a public company to a private company, and its shares are no longer available for sale on the stock market. Going private reduces the amount of disclosures that a company needs to make, allowing it more freedom to implement changes and pursue a more private, strategic path.
When a company goes private, current shareholders are usually offered a comparable price for their shares. While some shareholders will be disappointed that they are no longer able to reap the rewards of investing in a public company, going private can have some advantages. For one, the company may be able to pursue a long-term strategy that could benefit shareholders over time. Additionally, shareholders of a private company will likely have greater influence over the company’s decisions, since there is no need to answer to shareholders on a daily basis.
However, the effect on shareholders is ultimately dependent on the type of going-private transaction. In some cases, shareholders may have their shares bought out by the company at a discount, meaning that they could lose money on their shares. Alternatively, if the company is being bought by a third party, the shareholder may receive a premium price for their shares.
When a company goes private, its stock ceases to trade on the public markets. As a result, the value of the company’s shares can decline dramatically. For example, a stock that was trading in the public markets at $20 per share may be valued at only $10 per share when the company goes private. This decline in stock value can have a negative effect on shareholders, and can also lead to a decrease in the company’s assets, as shareholders may choose to liquidate their positions.
Furthermore, the decline in the company’s stock price can lead to a decline in its market capitalization, a figure that is used to measure the size of the company. Market capitalization is calculated by multiplying the number of outstanding shares with the share price. Since the share price has declined, the market capitalization of the company will also decline. As a result, the company will no longer be eligible for inclusion in certain market indices, as it may not be considered large enough.
Increased Costs
Going private can have some added costs for the company, such as legal fees, accounting fees, and other transaction costs. Furthermore, there may also be costs associated with making the necessary changes to become a private company, such as switching its accounting system and updating its tax filings. Additionally, the company may also incur additional costs related to making the transition to private, such as having to inform the public of its change in status.
The Benefits of Going Private
There are many potential benefits to going private for a company, one of the most significant being the potential for greater control over the company’s direction and decision-making. When a company is private, it does not have to answer to shareholders or meet certain SEC requirements. This can allow the company to focus on a more long-term strategy that could ultimately result in greater profitability. Additionally, going private can also lead to a decrease in the company’s debt, as it no longer needs to issue new shares to raise capital.
Furthermore, when a company is private, executive management is more likely to have more equity in the company. This can create incentives for the executives to make decisions that are in the best interests of the company, since they will have a vested interest in its success. Lastly, going private may also result in a decrease in the company’s tax burden, since private companies are subject to lower tax rates than their public counterparts.
Regulatory Obligations
Going private does not absolve a company from regulatory obligations. Companies that are listed on the stock markets are generally subject to certain disclosure requirements, such as providing financial statements and other information to the public. When a company goes private, these disclosure requirements are no longer applicable. However, the company is still obligated to comply with various other laws and regulations, depending on the jurisdiction in which it operates.
Benefits For Publicly Traded Companies
Despite the potential drawbacks, going private can offer some benefits to publicly traded companies. For instance, a company that goes private can focus on long-term strategies that may not have been possible while operating in a public setting. Additionally, going private can also decrease the amount of oversight that the company is subject to, ultimately allowing it more freedom to pursue its own business objectives.
Furthermore, when a company goes private, it can potentially reduce the amount of debt that it has to incur. Since it no longer needs to issue new shares to raise capital, it can focus its efforts on other methods of debt refinancing, such as borrowing from banks or other institutions. Finally, going private can also result in a tax savings for the company, as private companies are subject to lower tax rates than their public counterparts.
Implications for Stock Market Trading
When a company goes private, its shares no longer trade on public share markets. As a result, the stock market is deprived of the opportunity to capitalize on stock trading volumes and value gains associated with the company’s shares. Additionally, going private can lead to decreased liquidity in the stock market, which can have an adverse effect on market capitalization.
Furthermore, going private can also reduce the overall market volume, as it deprives traders of the opportunity to speculate on the company’s shares and capitalize on price movements in the stock. This can lead to decreased trading volume, which can ultimately reduce the market’s liquidity. Finally, when a company goes private, its shares can no longer be used as collateral for derivative products, thus reducing the availability of these instruments.
Implications for Investors
When a company goes private, it generally leads to a decrease in stock prices. This can have a significant impact on investors, as they no longer have the opportunity to trade and speculate on the company’s stock. Furthermore, going private can also reduce the liquidity of the stock market and decrease the availability of investment opportunities.
Additionally, when a company goes private, it also reduces the amount of information that is made available to investors about the company. Since the company does not have to make any disclosures to the public, investors are unable to get access to the same data that they had when the company was public. Lastly, if the company is bought by a third party, investors may receive a premium price for their shares, though this is not guaranteed.
Risks of Going Private
When a company goes private, it is no longer subject to the same oversight and regulations as it was when it was public. This can create potential risks for investors, as the company may no longer have the same level of transparency and accountability. Furthermore, since the company is no longer required to make public disclosures, investors may not have access to the same information that was once available. Additionally, since the company is no longer trading on public stock markets, its stock price is more likely to be subject to fluctuations, which could lead to losses for investors.
Alternatives to Going Private
For companies that do not wish to go private, there may be other options available. For instance, companies may consider delisting from the stock exchange, significantly reducing the number of shareholders, or offering buyouts to certain investors.
Additionally, companies can choose to remain publicly traded but limit the availability of their shares to a more select group of stakeholders, such as institutional investors or venture capitalists. This can allow companies to maintain some of the benefits associated with being publicly traded, such as access to capital and increased liquidity, without having to go through the process of going private.
Conclusion
Going private can be an attractive option for many companies, as it allows them greater control over their decisions and can provide them with access to capital. However, there are also a number of risks associated with going private, such as decreased transparency and accountability, fewer investment opportunities, and a decreased stock price. For companies that are considering going private, it is important to weigh the pros and cons carefully and consider alternatives, such as delisting or offering buyouts to certain investors.
