How Does Privatization Affect a Company's Shareholders?

An initial public offering (IPO) is a common occurrence. Private companies hold an IPO or go public by transferring portions of their ownership to purchasing parties by issuing equity or debt holdings to investors. However, the reverse scenario may also occur, where a public company transitions its public ownership to private interests.

In a public-to-private market transaction, a group of investors purchase the majority of a public company’s outstanding stock shares. This transaction effectively takes the company private by de-listing it from a public stock exchange. While companies may be privatized for a multitude of reasons, this event most often occurs when a company is substantially undervalued in the public market.

Taking a public company private is a relatively simple maneuver that typically involves fewer regulatory hurdles than private-to-public transitions. For example, a private group may offer to buy a company stipulating the price they are willing to pay for the company's shares. If a majority of the voting shareholders accept the offer, the bidder then pays the consenting shareholders the purchase price for every share they own.

For example, if a shareholder owns 100 shares and the buyer offers $26 per share, the shareholder nets a profit of $2,600 for relinquishing their position. This situation is typically favorable for shareholders because private bidders customarily offer a premium on the current market values of the shares.

Many well-known companies have de-listed from a major stock exchange at various points in their existence including Dell Inc., Panera Bread, Hilton Worldwide Holdings Inc., H.J. Heinz, and Burger King. Some companies de-list to go private, then return to the market as public companies with another IPO.

In some cases, the leadership of a public company will proactively attempt to take a company private. TESLA is an example. On August 7, 2018, Tesla (TSLA) founder and CEO Elon Musk tweeted that he was considering taking the company private at $420 per share—a substantial boost from the stock’s then trading price. After his announcement, shares spiked more than 10 percent, and trading was halted following the ensuing news frenzy. In a letter to employees, Musk justified his intentions, with the following message:

"As a public company, we are subject to wild swings in our stock price that can be a major distraction for everyone working at Tesla, all of whom are shareholders. Being public also subjects us to the quarterly earnings cycle that puts enormous pressure on Tesla to make decisions that may be right for a given quarter, but not necessarily right for the long-term."

While large public companies going private does not occur nearly as often as private companies going public, examples exist throughout market history. In 2005, Toys "R" Us famously went private when a purchasing group paid $26.75 per share to the company's shareholders. This price was more than double the stock's $12.02 closing price on the New York Stock Exchange in January 2004. This example shows that shareholders are often well compensated when they relinquish their shares to private concerns.