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. What kind of assets can be traded on a secondary market?

    Learn about the difference between the primary market and the secondary market, and what types of assets are traded on secondary ...
  2. Why would a company decide to utilize H-shares over A-shares in its IPO?

    Understand the difference between H shares and A shares. Learn why a company would decide to utilize H-shares over A-shares ...
  3. How do I place a buy limit order if I want to buy a stock during an initial public ...

    Learn how to place a buy limit order to buy a stock during an IPO. IPOs can be full of risks, and buy limit orders are one ...
  4. How do corporate actions affect floating stock?

    Learn what floating stock is, and find out about some of the actions a company may take to affect the amount of the company's ...
RELATED TERMS
  1. Ex Gratia Payment

    A payment made to an individual by an organization, government, ...
  2. Poison Put

    A takeover defense strategy in which the target company issues ...
  3. Enterprise Investment Scheme (EIS)

    A UK program that helps smaller, riskier companies to raise capital ...
  4. Assented Stock

    A share of stock owned by a shareholder who has agreed to a takeover.
  5. Back-End Plan

    An anti-acquisition strategy in which the target company provides ...
  6. Voting Poison Pill Plan

    An anti-takeover strategy in which the company being targeted ...

You May Also Like

Related Articles
  1. Stock Analysis

    GrubHub (GRUB): Will it Deliver?

  2. Brokers

    10 Most Famous Public Companies That ...

  3. Stock Analysis

    Is Bank of America Turning Around?

  4. Trading Strategies

    IPO Flippers And The Companies Who Hate ...

  5. Investing

    Strategies Activist Shareholders Follow

Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!