What is the effect of a public company going private?


Doesn’t the inability to trade the shares on a stock exchange alone diminish their value?

In: 1

A common misconception is that companies somehow “make” money from stock prices increasing. Most companies don’t really sell stock outside of that first offering of stock (called an IPO). It’s like if I sell you a book and you resell it; I only make money off of my sale to you.

Now, that’s not to say that publicly traded shares have no value to a company. They can often serve as collateral for loans. But this is a secondary thing.

When a company goes private, the more important change is in reporting. Publicly traded companies have to publish financial data about themselves every quarter. They are also controlled by shareholders and many other regulations that don’t apply to private companies.

Being publicly traded has its pros and cons. The pro, and it’s absolutely THE most important pro, is that you raise a TON of money during that IPO round at the very beginning. That’s the whole point, after all. You need a bunch of money to expand your growing company, and so you basically sell the ownership of the company to the public in exchange for a lot of money. That’s great, but…

Now the previous owner of the private company is not in control of the company any longer. The shareholders are in control of the company, and they will be the ones hiring/firing the CEO and executive team. If they don’t like the old original owner, then he’s not going to be the CEO and they will go find someone else. EVERYTHING is now beholden to the shareholders. It’s their company, and they want money. Namely, they want their stock to rise in value so they make money. If the current CEO can’t do that, then they will find someone else who will.

So, what are the benefits of buying back all that stock and taking the company private again? Well, it means that an individual owns the company again and is 100% the person in charge. Whatever their vision is, is what the goal is. You don’t need to answer to anyone, and you don’t need to make the shareholders value the #1 priority. Also, you don’t need to admit anything (like your financials) to any shareholders so you can keep all that stuff secret and run the company however you see fit. You’re the one in charge, end of story.

Private companies control who can buy their stock, unlike public companies. When the the company makes money, the profits still go to the shareholders, like any other company.

Thanks for the responses!

So if I own a share of stock in public company X, and X “goes private,” how would I go about selling my share?

Most people (or private equity firms) that take a company private are hoping to gain control, reduce reporting requirements, go under the radar a little and make improvements in order to grow their revenue and profits. The end game is to take it public again or sell it for a profit when its valuation increases.

It means they don’t have to answer to shareholders or worry about quarterly results to make investors happy. It means all profits go to the owner as they please. They don’t care about value today/tomorrow, but focus on long term… maybe they have a plan that they think will grow the business and they can eventually go public again for a higher value (this is a lot of what private equity firms do, take companies private and turn them around to spin out public again).