What Happens to Stock When a Company Goes Private?

When a company “goes private,” it means it’s transitioning from being publicly traded on a stock exchange to being privately held. Consequently, the existing publicly traded stock ceases to exist. Shareholders are typically bought out, receiving a predetermined price per share in exchange for their ownership. In essence, the public market for the company’s stock vanishes, and the company is no longer subject to the reporting requirements and regulations of being publicly traded.

Understanding the Transition: From Public to Private

Going private is a significant strategic decision for a company, often driven by a desire for greater operational flexibility, avoidance of short-term market pressures, or a belief that the company is undervalued by the public market. The process typically involves a buyout, where a private equity firm, a management team, or another entity acquires all outstanding shares of the company. Let’s break down the key aspects:

The Buyout Process

• Offer and Negotiation: A potential buyer makes an offer to purchase all outstanding shares of the company at a specified price per share. This offer is subject to negotiation with the company’s board of directors.
• Shareholder Approval: The proposed buyout typically requires approval from a majority of the shareholders. This is usually achieved through a shareholder vote.
• Tender Offer: The buyer then launches a tender offer, inviting shareholders to sell their shares at the agreed-upon price.
• Delisting: Once the buyer has acquired a sufficient percentage of the shares (often 90% or more), the company’s stock is delisted from the stock exchange. This means it is no longer publicly traded.
• Squeeze-Out: In some cases, if the buyer obtains a very high percentage of shares (e.g., over 90% in many jurisdictions), they can force the remaining minority shareholders to sell their shares at the offer price. This is known as a squeeze-out.

What Happens to Your Shares?

• Cash Payment: Most commonly, shareholders receive cash in exchange for their shares. The price per share is determined by the buyout agreement.
• Rollover (Less Common): In some rare instances, shareholders might be offered the option to “roll over” their shares into equity in the newly private company. However, this is typically only offered to key employees or large institutional investors. For the average retail investor, a cash payment is almost always the outcome.
• Tax Implications: It’s crucial to understand the tax implications of the buyout. The cash received is generally treated as a capital gain, and you’ll be responsible for paying capital gains tax on the profit (the difference between the price you paid for the shares and the price you received in the buyout).

Why Companies Go Private

• Reduced Regulatory Burden: Public companies are subject to stringent reporting requirements, including quarterly and annual financial statements, which can be costly and time-consuming.
• Avoidance of Short-Term Market Pressures: Private companies can focus on long-term strategies without the constant scrutiny of the stock market, which often prioritizes short-term results.
• Operational Flexibility: Private ownership allows for greater flexibility in decision-making and strategic initiatives without the need to answer to public shareholders.
• Undervaluation: Management or private equity firms might believe that the market is undervaluing the company, making it an attractive target for a buyout.
• Restructuring Opportunities: Private ownership provides an opportunity to restructure the company without the public glare, potentially leading to greater efficiency and profitability.

FAQs: Delving Deeper into Going Private

Here are 12 frequently asked questions to further clarify the implications of a company going private:

1. What does “delisting” mean?

Delisting refers to the removal of a company’s stock from a stock exchange. Once a company is delisted, its shares are no longer publicly traded. This is a crucial step in the process of going private.

2. Can I refuse to sell my shares when a company goes private?

While you can technically refuse, the buyer will typically aim to acquire a very high percentage of shares (often 90% or more). If they succeed, they can often squeeze out the remaining minority shareholders, forcing them to sell their shares at the agreed-upon price. Refusing to sell could leave you with illiquid shares in a private company with no readily available market.

3. How is the buyout price determined?

The buyout price is usually determined through negotiation between the buyer and the company’s board of directors. Factors considered include the company’s current stock price, its financial performance, its assets, and the overall market conditions. Independent valuations are often conducted to ensure fairness.

4. What happens to my stock options when a company goes private?

Typically, stock options are cashed out at the difference between the option’s strike price and the buyout price. If the strike price is higher than the buyout price, the options are usually worthless. The specific terms are usually outlined in the stock option plan agreement.

5. What are the risks of investing in a company that might go private?

The primary risk is that the buyout price may be lower than what you believe the company is worth. While the board has a fiduciary duty to act in the best interests of shareholders, there’s no guarantee that the buyout price will reflect your own valuation of the company.

6. Does going private always mean the company is in trouble?

No, not at all. While financial difficulties can sometimes lead to a company seeking private ownership for restructuring, going private is often a strategic decision driven by factors such as a desire for greater operational flexibility or a belief that the market is undervaluing the company. Many healthy and profitable companies have gone private.

7. What role does the board of directors play in a going-private transaction?

The board of directors has a crucial role in representing the interests of shareholders. They are responsible for evaluating the buyout offer, negotiating with the buyer, and ultimately recommending whether shareholders should approve the transaction. They have a fiduciary duty to act in the best interests of the shareholders.

8. How long does the process of going private usually take?

The timeline can vary depending on the complexity of the deal, regulatory approvals, and shareholder voting. However, it typically takes several months from the initial offer to the completion of the buyout and delisting.

9. What are the advantages of a company going private?

The advantages include reduced regulatory burden, avoidance of short-term market pressures, greater operational flexibility, and the opportunity for restructuring without public scrutiny. This can lead to long-term value creation.

10. What are the disadvantages of a company going private?

The disadvantages include the loss of access to public capital markets, which can make it more difficult to raise funds for future growth. There can also be resistance from shareholders who believe the buyout price is too low.

11. Can a company go public again after going private?

Yes, a company can go public again through an Initial Public Offering (IPO). This is often done after the company has been restructured and improved its financial performance under private ownership. This is commonly called a “private equity flip.”

12. Where can I find information about a company going private?

Information about a company going private is typically announced through press releases, filings with the Securities and Exchange Commission (SEC), and news articles. Pay attention to announcements regarding tender offers and shareholder meetings. Your brokerage will also notify you directly if you hold shares in a company subject to a going-private transaction.

Going private is a complex process with significant implications for shareholders. Understanding the mechanics of the buyout, your rights as a shareholder, and the potential tax consequences is crucial for making informed decisions when a company you invest in decides to take this path. While it might seem disruptive, it’s often a strategic move aimed at unlocking long-term value, even if it means your publicly traded shares disappear.