What is 'Privatization'
Privatization can refer to the act of transferring ownership of specified property or business operations from a government organization to a privately owned entity, as well as the transition of ownership from a publicly traded, or owned, company to a privately owned company. For a company to be considered privately owned, it cannot secure funding through public trades on a stock exchange.
BREAKING DOWN 'Privatization'Government privatization can occur based on the government’s desire to cease operations in an area or through various voter-driven initiatives. Corporate privatization may occur in order to restructure certain business operations that could have a negative impact on share prices or that would be challenging to complete when having to regard shareholder interests. Additionally, privatization may occur after a tender offer to purchase the company’s shares has been received or a merger with another company takes place.
Privatization of Government Operations
Economies are divided into two sections: the public sector and the private sector. The public sector represents activities in the areas of enterprise or industry that are handled by various government agencies. The private sector represents all other business operations that are not directly managed by a government entity.
The privatization of a government function involves transferring ownership of the associated business processes or facilities to a company within the private sector. For example, in 2012, Washington State voted to privatize the sale of liquor within the state. Previously, the sale of liquor was handled strictly through state-owned liquor stores. After the change was enacted, private businesses such as Walmart and Costco were able to sell liquor. Previously state-operated liquor stores were either closed or sold to privately held companies.
Transitioning Between Publicly and Privately Owned Corporations
Most companies start as private companies funded by a small group of investors. As they grow in size, they often access the equity market for financing or ownership transfer through the sale of shares. The first offering, called an initial public offering (IPO), signifies the transition of a private company into a publicly-traded company.
In some cases, the process of becoming a publicly-traded company is subsequently reversed through the process of privatization. This occurs when a group of investors, or a private company, purchases all of the shares in a public company that is looking to become private. Once the purchase is complete, the company can be deemed private by officially removing itself from the stock market and eliminating the option for the public trading of the associated stocks.
Privatization of Dell
In 2013, Dell Inc. transitioned from a publicly-traded to a privately-held company as part of a merger agreement. In order to complete the process, existing shareholders were offered a fixed amount per common share plus a specified dividend. Once complete, the company was able to conclude public trading and remove its common shares from the NASDAQ Stock Exchange in a process called delisting.