How Does Privatization Affect a Company’s Shareholders?

A private company typically goes public by conducting an initial public offering (IPO) for its shares. The reverse may also occur, however. A public company can transition to private ownership when a buyer acquires the majority of its shares. Shareholders must agree to the sale. Those who 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 delisting of the company’s shares from a public stock exchange. Shares are no longer available to the public at large. Companies may be privatized for several reasons but this event often occurs when a company is substantially undervalued in the public market.

Key Takeaways

• Shareholders approve an offer from investors for their shares in a public-to-private deal.
• Investors offer a premium above the current market price to induce shareholders to give up ownership in the company.
• A company’s shares can no longer be traded publicly after privatization because the company is delisted from the public exchange on which its shares were once traded.
• Going private is an easier process than going public due to fewer steps and regulatory hurdles.
• A company seen as undervalued in the market will typically opt to go private but there can be other reasons why 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 delisted 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.

Privatization also 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’s willing to pay. It’s typically a premium over the current market price. The bidder pays the consenting shareholders the purchase price for every share they own if a majority of voting shareholders accept.

A shareholder would receive $2,600 for relinquishing their position and ownership in the company if they own 100 shares and the buyer offers $26 per share. This situation often favors shareholders due to the 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.

Important

Privatization can be a nice boon to current public shareholders because the investors taking the firm private will typically offer a premium over the share price’s current market value.

Interest in Privatization

The leadership of a public company will proactively attempt to take a company private in some cases. Tesla (TSLA) flirted with this possibility but ultimately remained public. Founder and CEO Elon Musk posted on August 7, 2018 that he was considering taking TSLA private and had secured funding at $420 per share.

Tesla closed up 6.42% and trading was halted following the ensuing news frenzy after his announcement. The Securities and Exchange Commission (SEC) filed a civil complaint against Musk. The unabashed CEO justified his intentions with this 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

The premium that investors are willing to offer shareholders for their shares in a public-to-private deal is usually contingent on the investors buying a certain number of those shares. It’s normally an amount that gives them control of the company. The offer is withdrawn if that condition isn’t met.

What Happens to Shares When a Company Goes Private?

The public company’s shares are purchased at a premium by the investors buying the company when a publicly traded company becomes a privately held company. The company is delisted from the stock exchange where its shares were formerly traded. Shares 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 that’s paid for each share they own. They can no longer buy shares in the company through a broker.

What Happens to Private Shares When a Company Goes Public?

Private shares owned before the IPO may gain in value when a private company goes public through an initial public offering (IPO). They usually can’t be sold for a specific time beginning on the day of the IPO, however. This period is known as the lockup period and it may last 180 days.

The Bottom Line

Shareholders can make out well financially when a public company goes private. Toys “R” Us famously went private in 2005 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.

Shareholders are often well compensated for relinquishing their shares even though they may no longer have ownership in a company that goes private.

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