Going private is a transaction or a series of transactions that convert a publicly traded company into a private entity. This process leads to the delisting of the company’s shares from stock exchanges and relieves it from the scrutiny and regulatory requirements faced by public companies.
How Does Going Private Work?
A company goes private when a private entity, often led by the company’s management, private equity firms, or large shareholders, buys out all outstanding shares of the public company. This can be achieved through:
Leveraged Buyouts (LBOs)
An LBO involves using a significant amount of borrowed money to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loans taken to finance the buyout.
Management Buyouts (MBOs)
In an MBO, the management team of the company purchases the company, using their knowledge and experience to likely streamline or reorganize the company more effectively.
Tender Offers
A tender offer is a public, open offer or invitation to all shareholders to sell their stock for a specified price within a certain time frame. The price offered is usually at a premium to market value to incentivize the shareholders to sell.
Types of Going Private Transactions
Friendly Takeovers
This involves a mutual agreement between the buying entity and the company’s board of directors, facilitating a smoother transition.
Hostile Takeovers
Here, the buying entity attempts to acquire the company without the consent of its board of directors, often by buying a significant portion of the company’s stock on the open market.
Private Equity Buyouts
Private equity firms deploy their capital to buy out public companies with the goal of restructuring and improving their financial performance before eventually selling them for a profit.
Examples of Going Private Transactions
Dell Inc. - 2013
One notable example includes Dell Inc.’s buyout in 2013, where founder Michael Dell, along with private equity firm Silver Lake Partners, took the company private for $24.4 billion.
Heinz – 2013
Another prominent case is the Heinz deal in 2013 where Berkshire Hathaway and 3G Capital acquired H.J. Heinz Company for $23 billion, taking it private.
Special Considerations
Regulatory Approvals
Such transactions require regulatory approvals, including adherence to SEC regulations, antitrust laws, and other relevant requirements.
Financing Structure
The structure and financing of going private deals are intricate, involving a combination of equity, debt, and mezzanine financing.
Shareholder Impact
Shareholders may face decisions of whether to sell their shares at the offer price or disagree with the offer, potentially leading to legal disputes.
Impact on Employees
Employees might face uncertainty during the transition period, including changes in management structure and company strategy.
Historical Context
The concept of going private became more prominent during the 1980s when numerous LBOs were conducted as firms saw opportunities to optimize operations and turn around struggling companies without the pressures of public market scrutiny.
Applicability
Going private transactions are typically employed by companies for several reasons:
- To avoid the regulatory burdens and public scrutiny associated with being a public company
- To allow for restructuring and strategic changes without the pressure of quarterly earnings reports
- To provide better alignment of interests between company management and investors
Related Terms
- Public Company: An entity whose shares are traded on public stock exchanges, subject to regulatory compliance and public disclosure requirements.
- Private Equity: Investment firms that acquire businesses, aiming to improve their performance and subsequently sell them for a profit.
- Mergers and Acquisitions (M&A): The process of consolidating companies or assets, which can include going private transactions as part of an acquisition strategy.
FAQs
What are the benefits of going private?
What is a leveraged buyout?
How does going private affect existing shareholders?
Why do companies decide to go private?
References
- “Leveraged Buyouts: Concepts, Characteristics, and Practical Applications.” Corporate Finance Institute.
- “The Dynamics of Going Private: Financial and Strategic Considerations.” Harvard Business Review.
- “Case Study: The Privatization of Dell Inc.” Stanford Graduate School of Business.
- SEC Regulations on Going Private Transactions.
Summary
Going private transactions can offer significant strategic advantages, although they come with their own complexities and challenges. Understanding the process, types, and considerations involved is crucial for stakeholders to make informed decisions. Historical examples, such as Dell and Heinz, provide valuable insights into the intricacies of these transactions.
