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
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.
What happens to shareholders when a private company is sold? ›
When a company is sold, shareholder agreement may be cashed out at the time of sale, or they may continue to own shares in the new company. In either case, they may see a return on their investment. If the new company is successful, shareholders may see the value of their shares increase.
What are the side effects of privatization? ›
Disadvantages of Privatization
- Natural Monopoly. Privatization in some sectors where there is low competition may lead to the monopoly of a single private firm. ...
- Decline in Public Interest. ...
- Lack of Regulations. ...
- Low Future Investment. ...
- Fragmentation of Companies.
It gives investors who purchase the private shares an ownership stake in the company. In exchange for obtaining money to grow your business, you give up sole ownership. Later, you may decide to pay the investors back and take back equity, or you may keep them on as part-owners until you sell your company.
What are the benefits of shareholders in a public company? ›
Common shareholders are granted six rights: voting power, ownership, the right to transfer ownership, a claim to dividends, the right to inspect corporate documents, and the right to sue for wrongful acts. Investors should thoroughly research the corporate governance policies of the companies they invest in.
Do I lose my shares if a company goes private? ›
If you own shares in a public company that goes private, you must sell your shares at the acquisition price that's been agreed to by the parties.
What happens when a private company buys back shares? ›
A share buyback is a form of shareholder remuneration where companies buy back their own shares to reduce their capital by cancelling the repurchased stock. While the number of shares in circulation falls, shareholders' stake in the company and the amount they are due from future dividends increases.
What are the benefits and disadvantages of Privatisation? ›
Some advantages of privatisation are: increased revenue, reduction in government borrowing, promotion of competition and the promotion of efficiency. Some disadvantages of privatisation are: monopoly abuse, short term is valued more than the long term, free lunch syndrome and 'selling the family silver'.
What are the long term effects of Privatisation? ›
The productivity of privatized is about 6.5% higher in the long run than prior to privatization. These results provide evidence that productivity improvements from privatization continue to occur over a much longer term than do previous before–after studies.
What will happen if NHS is Privatised? ›
Private firms will not carry on providing an unprofitable service any longer than they have to. This could lead to a lack of continuity, with some patients finding their health providers change during an illness.
Generally, all shareholders of a private limited company are entitled to inspect records of minutes of board meetings and copies of all shareholders' written resolutions. They are also entitled to receive notice of general meetings and copies of the company's report and accounts.
Do shareholders get money from the company? ›
Established listed companies pay dividends regularly to their shareholders on either a quarterly, half-yearly, or an annual basis. When you hold a particular stock for the long term, you may get to enjoy dividend payouts in addition to an appreciation in the value of the shares.
Do shareholders run the company they own? ›
Companies are formed to conduct legal activities, that's all, and profit is not a mandatory requirement, though profitability is always an advantage. Directors of a company have full control of it. Shareholders have no legal right to govern the activity of a company for their own benefit.
What happens to shareholders when a 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 disadvantages of being a shareholder? ›
Cons:
- Unstable market. If the value of the stock decreases after a shareholder has purchased it, they've lost that money.
- Dividends. Even when they're prospering, companies are under no obligation to the shareholders to offer dividends. ...
- Limited rights. The downside of limited risk is limited rights.
A company can return value to its shareholders by buying back some of its shares. This is known as a "share buyback" or a "company purchase of own shares".
Can shares of private company be sold to anyone? ›
To sell private company stock—because it represents a stake in a company that is not listed on any exchange—the shareholder must find a willing buyer. In addition, a sale of private stock must be approved by the company that issued the shares. Some companies may not want their shares to be widely distributed.
What happens to shares when a company is bought UK? ›
Sometimes the company buying will offer its own shares as payment, or sometimes it will offer an all-cash deal. It could also offer a mixture of cash and shares. If shares are offered as part of the deal, then the value of the offer will move up and down in accordance with the purchaser's share price.
Can a shareholder sell his shares back to the company? ›
If you want to sell your shares in a company - for example, because you work for the company but are retiring or leaving, or you have had a dispute with other shareholders - selling them back to the company may be your best option.
