How Does Privatization Affect a Company’s Shareholders?

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It’s a well-known phenomenon, when companies go public by transferring portions of their ownership to purchasing parties, by issuing equity or debt holdings to investors, through an initial public offering. But the reverse scenario may also occur, where a public company transitions its ownership to private interests. In such “public-to-private” market transactions, a group of investors purchases the majority of a public company’s outstanding stock shares, effectively making the company private by delisting it from a public stock exchange. While companies may be privatized for a multitude of reasons, this event most often occurs when a company is substantially undervalued in the public market.

Privatization

Making a public company private is a relatively simple maneuver, that typically involves fewer regulatory hurdles than there are with private-to-public transitions. At its most fundamental basis: the private group makes an offer to the company and its shareholders, stipulating the price it’s willing to pay for the company’s shares. If a majority of the voting shareholders accept the offer, the bidder then 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 pockets $2,600 for relinquishing his or her position. This situation is usually favorable for shareholders because private bidders customarily offer a premium to current market values of the shares.

Interest in Privatization

In some cases, the leadership of a public company will proactively attempt to take a company private, as was the case with Tesla (TSLA) founder and CEO Elon Musk. On August 7, 2018, Musk tweeted that he was considering taking the company private, at $420 per share–a substantial boost from the stock’s then trading price. After his announcement, shares spiked more than 10%, and trading was halted, following the ensuing news frenzy. In a letter to employees, Musk 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.”

The Bottom Line

Some of the world’s most noted companies have gone from public to private, including Heinz, Dell Computer, and Hilton. In 2005, Toys “R” Us famously went private, when a purchasing group paid $26.75 per share to the company’s shareholders. This was more than double the stock’s $12.02 closing price on the New York Stock Exchange in January 2004. This example underlines that shareholders are indeed typically well compensated for relinquishing their shares to private concerns.

Source: Investopedia

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