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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.

Privatization

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 voted to accept the offer, shares of the company are sold to the private bidder, and the company becomes privately held.

Obstacles

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.

Interest in Privatization

Sometimes, the leadership of a public company will attempt to or propose to take their company private. Such is the case with Elon Musk, the founder and CEO of Tesla (TSLA). On August 7, 2018, Musk tweeted that he was considering taking the company private at $420 per share, a substantial premium to where the stock was trading. Shares spiked more than 10% following his tweet and were subsequently halted for trading given the news frenzy that ensued. In a letter to Tesla employees following his tweet, Musk justified his intentions by saying that the scrutiny of being a public company may be holding the company back from pursuing its long-term interests. Musk wrote:

"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

Some of the most famous companies in the world have gone from public to private, including Heinz, Dell Computer, and Hilton. 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.

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