What Happens To A Stock When The Company Goes Private?
When a company goes from publicly traded to private, understanding what happens to the stock can be complicated. A “going private” transaction typically involves the company being acquired by a private equity firm, another company, or a group of investors. Going private can be an attractive exit strategy for public companies, allowing them to focus on long-term growth prospects, free from the short-term focus of investors, analysts and journalists.
A company’s decision to go private can have an immediate impact on the stock. Depending on the type of transaction, minority shareholders may have to accept an offer, or the company may opt to buy back shares at a premium. Generally, stock prices typically drop following a going private transaction, as the company’s shares become illiquid and trading halts. That said, going private can also bring benefits. By no longer having to report information to the public, executives may be able to make decisions more quickly, gain access to long-term capital, and adopt strategies that were not feasible when the company was public.
Experts say that a company’s decision to go private presents unique opportunities and implications for investors, who can no longer compete for holdings in the company. “Going private transactions are an attractive exit strategy for public companies, as it allows them to avoid the scrutiny of Wall Street and focus on long-term growth objectives,” says Tim Doolin, managing partner at investment firm Torrey Cannon. “However, it can also have a significant impact on investor portfolios.”
When a company goes private, investors are no longer able to easily buy and sell their shares. As a result, shareholders may have to accept the private offer, or the company may opt to buy back shares at a premium. This can have a significant impact on investor returns. Moreover, since a company will no longer have to publish information to the public, the liquidity and valuation of the stock may suffer. “If you are an individual investor, it can be difficult to assess the value of the shares you own when the company goes private,” adds Doolin.
That said, going private transactions can be beneficial for some investors. By investing in a company before it goes private, investors may be able to benefit from the premium when the company is taken over. Moreover, when a company becomes private, it has access to more capital which in turn can result in faster growth and a higher company valuation. In some cases, a company may also be more nimble and able to pivot more quickly as it no longer has to answer to public shareholders and more quickly capitalize on new opportunities.
Tax Implications Of Going Private
In addition to the implications for stock prices, going private transactions may also have tax implications for investors. A company’s decision to go private may generate capital gains, which are subject to income tax. Moreover, investors may also be subject to taxes on the purchase and sale of shares, as well as dividend payments, depending on the terms of the transaction.
Furthermore, investors must also take into account the transaction costs associated with going private. These costs, which may include stock transfer taxes, legal fees, and other due diligence expenses, can have a significant impact on investor returns. “It is important to understand all of the potential implications of a going private transaction,” says Charles Bunker, CFA, head of investments at Bunker Consulting. “It is not always the best strategy for a company or investor.”
Given the complexity of going private transactions and the potential implications for investors, experts recommend consulting with a financial advisor before making any decisions. Investors may also want to consider diversifying their portfolio to reduce risk and mitigate volatility. Additionally, investors should make sure to do their own research and thoroughly understand the company and the transaction before investing.
What To Do When A Company Goes Private
Before a company’s stock is delisted from the exchange, executives must typically file a request with the relevant regulator. Once the request is accepted, the stock is delisted and the company’s shares become illiquid securities. For investors, it can be difficult to assess the value of the stock and make informed decisions.
For investors who want to exit the position before the company is delisted, financial advisors typically recommend selling the stock. Depending on the terms of the transaction, the company may also opt to buy back the shares. If this is the case, investors typically have a short time window to accept the offer.
Experts also recommend investors take advantage of tax loss harvesting, a strategy designed to offset capital gains. Essentially, investors can sell their shares at a loss to minimize the tax implications of going private. That said, since the stock is no longer actively traded, investors may not be able to find a buyer.
An alternative strategy is to hold onto the stock, as some companies that go private may eventually return to the market. However, this is not a common occurrence and investors may not see a return for several years if at all.
Public Offering Vs. Going Private
A public offering is one way for companies to raise capital, gain recognition and increase their valuation. It enables a company to access long-term capital and boosts liquidity. By offering shares to the public, companies can also enable existing shareholders to cash out or diversify their holdings.
Going private, on the other hand, can have the opposite effect. By no longer offering shares to the public, companies can reduce their public scrutiny, allowing executives to make decisions more quickly and to focus on long-term growth. That said, companies must consider the potential implications of going private and the impact it may have on investors and other stakeholders.
Given the complexity of going private transactions and the potential implications for investors, it pays to do research and consult with a financial advisor before making any decisions. Additionally, investors should diversify their portfolio to reduce risk and take advantage of tax-loss harvesting to offset any potential capital gains.
The Role Of Private Equity Funds
Private equity funds often play a key role in taking companies private. Private equity funds provide capital to businesses, giving them access to long-term capital that is not provided by the public markets. Furthermore, private equity funds may also offer management advice and operational expertise to help the company reach its goals.
In some cases, private equity funds may take a company private in order to turn it around or to make it more profitable. For example, private equity funds may restructure the company, remove underperforming units, and enhance operations. By improving profitability, the private equity fund can then take the company public, offering investors the potential to benefit from higher share prices.
Self-tender offers, whereby companies purchase their own shares to reduce the public float, are increasingly popular with private equity funds. In some cases, private equity funds may offer a premium to shareholders in exchange for their holdings. By reducing the public float, private equity funds can often take the company private without a shareholder vote. Furthermore, by taking the company private, private equity funds can also protect the company from hostile takeovers, allowing executives to focus on long-term growth.
When a company goes private, minority shareholders may find themselves in a precarious position. If they choose to accept the private offer, they may have to sell their shares at a discount. Alternatively, they may be able to remain shareholders and eventually benefit from a potential buyout at a higher price. That said, shareholders should be aware that most companies that go private concentrate their ownership and deconsolidate, meaning the shares become virtually worthless.
For some minority shareholders, however, going private may be a favorable exit strategy. By removing their shares from the public markets, investors can avoid being subject to swings in stock prices due to market volatility and also benefit from tax-deferred capital gains. Additionally, as a private company, the company will no longer have to publish information to the public, meaning that the shares are not subject to the scrutiny of analysts, journalists, and investors.
While going private can offer investors unique opportunities, there are many risks and complexities that must be considered before making an investment decision. Investors should do their own research and consult with a financial advisor before committing to a going private transaction.
