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 means selling off assets and going out of business.
Going private means buying up all the public shares so that company is no longer publicly traded. It can be good if owner doesn’t saddle business with too much debt, as owner can focus on longer term strategy vs. always having to hit quarterly numbers. But it also means somebody can run a company into the ground and there is nobody to stop them — see Musk and Twitter.
Here’s a real ELI5 answer. Imagine I start a company. I own 100% of the company. I’m also probably very poor – most companies don’t make much money at the start. Any profits the company makes go straight to me.
I decide to sell shares in the company. I have 10 shares that I will sell and in exchange for giving me money today I will give you 10% of future profit cause you effectively own 10% of the company. Company shares are usually based on a multiple of the earnings stream. If profits go up so will the share price.
Let’s say I am working on a new product that will grow earnings by 10x. And I realize that based on future earnings – the shares are really cheap. IE, I expect the value of the shares will rise when everyone realizes how great my new product is. Companies may choose to buyback shares when they feel they are undervalued. The more shares the company owns the more future profits they earn.
If a company buys back all the outstanding shares, they share profits with noone “public”, IE no one outside the company. When all shares are owned by the company it has been taken private.
A private company is a company that is owned by a single individual or small (relatively speaking) group of people. It cannot sell shares on the open market to the public. A public company is one who has sold ownership (shares) to the public on the open market. A public company going private means an individual/group of people are buying up the shares of the company and will no longer be trading them on the open market.
Elon Musk took Twitter private – he bought up the public shares and now controls the company.
Liquidation is when a company is selling off as many of its assets as it can to generate cash (usually due to the company closing that section of business, bankruptcy, etc).
There’s a few things you need to think about with your story – every CEO has the goal of making the stock price rise. That being said, an individual/group that plans on taking a company private will also want the value of the company to rise.
Advantages of going private: Significantly less financial regulation, more control over management decisions, and being able to focus more on long-term company growth than short-term profits.
Disadvantages of going private: Harder to raise capital since you can’t sell shares to the public market, potentially more risk for your money (most people that take a company private essentially put all their eggs in one basket – aka the company – rather than diversify their portfolio), potentially (not always) more legal risk for the owner depending on the structure of the company (though someone rich enough to take a company private will likely be rich enough to have a good team of lawyers structure the company in such a way that limits their liability)
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