How does privatization affect a company's shareholders?

By Chad Langager AAA
A:

The most recognized transition between the private and public markets is an initial public offering (IPO). Through an IPO, a private company "goes public" by issuing shares, which transfer a portion of ownership in the company to those who buy them. However, transitions from public to private also occur. In public to private market transactions, a group of investors purchases most of the outstanding shares in the public company and makes it private by delisting it. The reasons behind the privatization of a company vary, but it often occurs when the company becomes heavily undervalued in the public market.

The process of making a public company private is relatively simple and involves far fewer regulatory hurdles than the private to public transition. At the most basic level, the private group will make an offer to the company and its shareholders. The offer will stipulate the price the group is willing to pay for the company's shares. Once the majority of the voting shares have accepted the offer, shares of the company are sold to the private bidder, and the company becomes privately held.

The biggest obstacle in this process is getting the acceptance of a company's shareholders, the majority of which need to accept the offer in order for the transition to be completed. If the deal is accepted by the shareholders, the company's buyer will pay a consenting group of shareholders the purchase price for each share they own. For example, if a shareholder owns 100 shares and the buyer offers $26 per share, the shareholder will receive $2,600 and relinquish his or her shares. There is a large benefit to this type of transaction for investors, as the private group usually offers a substantial premium for the shares compared to the current market value of the firm.

An example of a public company that became private is Toys "R" Us. In 2005, a purchasing group paid $26.75 per share to the company's shareholders - more than double the stock's $12.02 closing price on the New York Stock Exchange in January 2004, the trading day before the company announced it was considering dividing the company. As this example shows, shareholders are usually well compensated for relinquishing their shares.

To learn more, read Knowing Your Rights As A Shareholder, IPO Basics Tutorial and Why Do Companies Care About Their Stock Prices?

RELATED FAQS

  1. I lost my share certificate. Do I still own the stock?

    Regardless of whether a shareholder loses his or her stock certificate, that person still owns the shares. However, in order ...
  2. What is the downtick-uptick rule on the NYSE?

    To ensure orderly markets, the New York Stock Exchange (NYSE) has a set of restrictions that it can implement when experiencing ...
  3. What is an odd-lot buyback?

    An odd-lot buyback occurs when a company offers to purchase shares of its stock back from people who hold less than 100 shares. ...
  4. If an employee covered by a SIMPLE leaves his employer within the two-year period ...

    During the first two years after the SIMPLE IRA is established, assets held in the SIMPLE must not be transferred or rolled ...
RELATED TERMS
  1. LLC Operating Agreement

    An LLC Operating Agreement is a document that customizes the ...
  2. Succession Planning

    A strategy for passing each key leadership role within a company ...
  3. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  4. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  5. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  6. AG (Aktiengesellschaft)

    AG is an abbreviation of Aktiengesellschaft, which is a German ...
comments powered by Disqus
Related Articles
  1. The Defined-Contribution Plan: A Flawed ...
    Retirement

    The Defined-Contribution Plan: A Flawed ...

  2. 3 Reasons To Use An Employer-Sponsored ...
    Retirement

    3 Reasons To Use An Employer-Sponsored ...

  3. 4 History-Making Wall Street Crooks
    Personal Finance

    4 History-Making Wall Street Crooks

  4. Some Good News Is Bad News For Investors
    Markets

    Some Good News Is Bad News For Investors

  5. Pages From The Bad CEO Playbook
    Retirement

    Pages From The Bad CEO Playbook

Trading Center