A private company typically goes public by conducting an initial public offering (IPO) for its shares. However, the reverse may also occur. A public company can transition to private ownership when a buyer acquires the majority of it shares.

This public-to-private transaction effectively takes the company private by de-listing its shares from a public stock exchange. While companies may be privatized for a number of reasons, this event often occurs when a company is substantially undervalued in the public market.

Key Takeaways

  • With a public-to-private deal, investors buy out most of a company's outstanding shares, moving it from a public company to a private one.
  • The company has gone private as the buyout from the group of investors results in the company being de-listed from a public exchange.
  • Going from public-to-private is less common than the opposite, in which a company goes public, typically through an initial public offering (IPO).
  • The process of going private is easier and includes fewer steps and regulatory hurdles than the process of going public.
  • Typically, a company seen as undervalued in the market will opt to go private, although there can be other reasons such an action is taken.

Privatization

Taking a public company private is relatively straight forward and typically involves fewer regulatory hurdles than private-to-public transitions. Usually, a private group will tender an offer for a company's shares and stipulate the price it is willing to pay. If a majority of voting shareholders accept, the bidder 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 receives $2,600 for relinquishing their position. This situation often favors shareholders because private bidders customarily offer a premium over the share's current market value.

Many famous public companies have gone private and de-listed their shares from a major stock exchange. This includes Dell Computers, Panera Bread, Hilton Worldwide Holdings, H.J. Heinz and Burger King. Some companies de-list to go private, only to return to the market as public companies with another IPO.

Privatization can be a nice boon to current public shareholders, as the investors taking the firm private will typically offer a premium on the share price, relative to the market value.

Interest in Privatization

In some cases, the leadership of a public company will proactively attempt to take a company private. Tesla (TSLA) is one example of a company that flirted with the possibility, but ultimately remained public. On August 7, 2018, founder and CEO Elon Musk tweeted he was considering taking TSLA private and had secured funding at $420 per share.

After his announcement, Tesla closed up 6.42% and trading was halted following the ensuing news frenzy. The Securities and Exchange Commission (SEC) filed a civil complaint against Musk. The unabashed CEO 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.

The Bottom Line

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 private equity groups 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.