What does Going Private Mean?

The process of going private usually involves a company buying back all of its outstanding shares and becoming a privately held company. Companies tend to do so for many reasons, such as increasing control over the company or making it easier to sell the business. Going private can also make it easier to raise Capital since there are fewer regulatory requirements.

When the Market price of existing shares is low, making it less expensive to purchase them, going private is a smart alternative. When a company faces trouble selling shares or Bonds to raise money, which is a frequent issue for businesses with a small market for their securities, it is more likely to choose this alternative. A going private deal could either be completed through a Management Buyout or a private equity buyout.

Going Private Examples

One of the most well-known examples of a company going private is Michael Dell's million-dollar company buyout of Dell Inc. in 2013. Dell had been public since 1988 but faced increasing pressure from active investors who were unhappy with the company's performance. By taking Dell private, Michael Dell was able to implement his vision for the company without interference from outside shareholders.

Why do Companies Go Private?

There are several reasons why public companies go private. Here are the major ones jotted down for better understanding:

• The short-term expectations of stock investors and analysts must frequently be met or fulfilled by public companies. The value of their stock significantly declines when expectations are not met. They ought to prioritise short-term goals above long-term objectives. However, going private allows businesses to concentrate on long-term goals and objectives

• When the company is facing forced delisting, it goes private. For instance, the firm no longer satisfies the conditions for being listed on the stock exchange because it was liquidated or got a prolonged fine without demonstrating a desire to reform

• The benefits of having listed shares on the stock exchange do not accrue to the company. In fact, initially, they were able to obtain capital through the initial Offering. However, the market capitalisation decreased along with their share price. small cap stocks have less appeal to investors. It makes stock trading in the corporation difficult, and this is when companies go private

• When a company's stock price is far below its Book Value, it often decides to go private. The company can be seen by private purchasers as having compatible strategic resources for them. As a result, they may buy the firm at an affordable deal, thanks to the low share price

• Last but not least, when companies lack capital, low prices prevent them from maximising their ability to obtain money through the appropriate issue of shares. The company's new shares might not be appealing to investors as well

How can Companies Switch to Private?

A public company can choose to go private for several reasons, and this can be done in several ways, which are as follow:

Tender Offer

In a tender offer, a company offers to publicly purchase most or all of its outstanding shares. The acquirer can use a combination of cash and equity to fund purchases. As an illustration, Company X presents Company Z with a tender offer. In this scenario, owners of Company Z will get 80% cash and 20% shares in Company X.

Private Equity Buyouts

The acquirer takes over the target company's controlling interest. They could use debt to pay for purchases. The target firm is then restructured by the buyer with its assistance, making it more competitive. If the target firm is successful, it can provide enough cash flow to pay off the loan. The acquirer is often a private equity company.

Management Buyout

In this, the management of the target company purchases its shares from the general public and transfers them to private ownership. Management typically uses debt to finance acquisitions, just as private equity transactions. The fact that this acquisition was made by an internal party is a plus.

Key Points to Consider

If you're considering taking your company private, here are a few things to consider. First, you'll need to have the financial resources to buy back all of the outstanding shares. You'll also need to be prepared for increased scrutiny from regulators and the media. Finally, going private can be complex and time-consuming, so it's important to have a good team of advisers to help you through it.

Takeaway

A public company going private provides greater flexibility to take risks since the market, media, and regulators are not watching. The demands of quarterly reporting are not binding for private companies. A company can focus on enhancing long-term shareholder wealth by becoming private, ignoring short-term prospects and commitments.