Going Private

What Is Going Private?

Going private is the process by which a company that trades on a public stock exchange becomes privately owned. Once the transaction is complete, the company's shares are no longer bought and sold on the open market. Ownership shifts to a small group of investors, a controlling shareholder, or sometimes the company's own managers. When an outside buyer is involved, the deal is often called a take-private transaction, and it is usually followed by a delisting from the exchange.

How It Works

A going-private deal often begins with a tender offer to buy all the publicly held shares at a fixed price. That price is frequently set above the recent market price, a difference known as a premium, to encourage shareholders to sell. The buyer may be a private equity firm, a group of executives backed by outside financing, or a major shareholder. Many of these deals use a leveraged buyout structure, in which a large share of the purchase price is borrowed against the company's assets or future cash flows.

Common steps include:

• Negotiating a price, often with a committee of independent directors
• Securing financing and obtaining the required shareholder approval
• Completing the purchase and delisting the shares from the exchange

After delisting, the company generally stops filing the public reports that listed companies must provide, although it may still report to lenders and other private stakeholders.

Why It Matters to Investors

For shareholders who sell, a going-private deal can provide a clear cash exit, often at a premium to the prior market price. Shareholders who do not sell have their shares converted into the offered payment, and they no longer hold stock in a public company.

Going private also raises concerns. When managers are on the buyer side, they have a conflict of interest, since a lower purchase price can benefit them. In the United States, securities rules require extra disclosure for these transactions, and shareholders sometimes challenge deal terms in court. Investors who remain in the company may lose access to regular public information, trading liquidity, and the ability to buy more shares on the open market.