I’m writing a story about a company with a new leader focused on making stock prices rise. I want to get the company to do basically the opposite of making their company public. From what I’ve read, you don’t want to do buybacks as a company and going private might be equally as bad, but is it?
In: Economics
Liquidation is like taking some of your older video games to GameStop or selling them on eBay because you need some extra cash to make rent this month. You’re taking things you own that have value, but aren’t cash, and turning them into cash because you need cash right now. On a company scale, that’s a company selling off things it owns like property or investments because it needs cash for something. Often to pay off debts it owes. It usually isn’t a good thing.
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To explain “going private”, you have to understand what the difference between “public” and “private” is.
Companies start out private by default. All it means to be “private” is that the company has an owner. Within the limits of the law, an owner of a company can essentially do whatever the flip they want with it. It’s theirs. If they want to make ultra-risky plays, drive the company into the ground, siphon off all the money it makes into their own pockets, whatever, they’re free to do so. They are the captains of their own ship and they can spin the helm wherever they want.
When you “go public”, though, that’s essentially you making a kind of deal with the devil. The deal is, you give up your uncontested position at the helm as owner, and allow random people to buy that position. Except, you don’t outright sell control of the helm to a single person (that would be selling the company to another private owner). Instead, it’s more like you retrofit your ship so it is steered by committee, and you’re selling seats on that committee. To prevent too many hands on the steering wheel at once, the committte (“the board of directors”) hire a dedicated helmsman to steer the ship the way the board commands (that’s what a CEO is, by the way).
As for what you get in exchange for this deal, it’s that (hopefully) vast sum of money that all those people will pay to be on the board. If your company looks like it has potential to grow and expand, people will want to pay to be on that board, because being part of the owner club means they get a slice of the profits the company makes. And if they hire a good enough CEO who can steer the ship they way the board wants with little intervention, they barely have to do anything. It’s passive revenue. Company steers itself, they sit back and collect checks. And they may or may not pay through the nose for the opportunity. All those checks go right into your pocket. You can either ride off into the sunset with it, or (more likely) you pump it back into the company to supercharge it, so the company grows quickly and makes even more money faster.
The potential problem with this arrangement is that when a company is public, it’s being steered exclusively by owners who are only in it to get those sweet kickback checks. Thus, the company will be steered in a way that aggressively seeks profits above all other functions. If there’s anything that you, possibly still a partial driver at this point, would like to steer your company into that *isn’t* a move that maximizes profits, no one else on the board will let you do it. They might even swing their weight around and try to force you out of the board entirely if you try.
If you are so convinced that you need to do this, though, you have an option, if you can afford it: buy all the committee seats back from them. Chase all the other cooks out of the kitchen. Once you control all of the seats, the board essentially self-destructs and you’re back to being the sole owner. Now you can, once again, do whatever the flip you want with the company, and answer to no one. That’s going private.
The reasons this happen can vary a lot. Maybe an idealistic owner wants to apply their vision uncontested. But most often it’s because the company is tanking, and all these corporate investors siphoning money off the top of the company aren’t doing it any favors. It’s shaking off the parasites so the company can knuckle-down and get its act together without a committee getting in the way. In that sense it can kind of feel the same way a liquidation feels–the company is doing this because they’re not doing so hot right now–but they’re not directly related concepts.
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