Going Private: Definition, How It Works, Types And Example

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Going Private: Definition, How It Works, Types, and Example

Congratulations! You’ve stumbled upon our blog post dedicated to all things finance. Today, we’re diving into the fascinating world of going private. Maybe you’ve heard this term before, but you’re not entirely sure what it means or how it works. Well, you’ve come to the right place! In this article, we’ll cover the definition, how going private works, different types, and provide an example to make it crystal clear. So, let’s get started!

What is Going Private?

Going private is an intriguing financial concept that revolves around transforming a publicly traded company into a private entity. In simple terms, it is the opposite of an initial public offering (IPO). Instead of opening up a company to public investors, going private involves closing the company off from the public and returning it to private ownership.

So, you might be wondering, why would a company choose to go private? Well, there are a few reasons that can drive this decision:

1. Enhanced flexibility and privacy: As a private company, there is less scrutiny from external stakeholders, such as the media and shareholders. This allows management to focus on long-term strategies without the pressure of meeting quarterly expectations.
2. Reduced compliance burdens: Publicly traded companies have to comply with various reporting and regulatory requirements. Going private can alleviate these burdens and streamline operations.
3. More control: By going private, existing shareholders or a group of investors gain more control over the company, enabling them to implement strategic decisions without the influence of public shareholders.

How Does Going Private Work?

The process of going private usually begins with a stock buyback. This involves the company purchasing outstanding shares held by public shareholders, effectively reducing the number of shareholders and taking the company private. The price offered for the shares is often higher than the prevailing market price to incentivize shareholders to sell.

Once the company successfully buys back the shares and becomes privately owned, it can delist itself from the stock exchange where it was previously listed. Delisting removes the company’s shares from public trading and restricts them to private transactions only.

Types of Going Private Transactions

There are different types of going private transactions, each with its own unique characteristics:

1. Management buyout (MBO): In an MBO, the existing management team proposes to purchase the outstanding shares of a public company. They may partner with private equity firms or other financial institutions to finance the transaction.
2. Private equity buyout (PEBO): In a PEBO, a private equity firm acquires all outstanding shares of a publicly traded company. This type of transaction is often funded through a combination of investor capital and borrowed money.
3. Merger or acquisition: Sometimes, a company may choose to go private by being acquired or merging with another private company. This allows the shareholders of the company to receive a premium for their shares while becoming part of a privately held entity.

Example of Going Private

An excellent example of going private is related to the technology giant Dell. In 2013, the company’s CEO, Michael Dell, partnered with private equity firm Silver Lake Partners to propose a management buyout. They offered $13.65 per share to take the company private.

This proposal faced opposition from some shareholders who believed the offer undervalued the company. However, after a series of negotiations, Michael Dell and Silver Lake Partners increased their bid, and the deal ultimately went through. In the end, Dell successfully went private, allowing management to have greater control over the company’s future direction.

In conclusion, going private is a strategic move that can benefit companies seeking enhanced flexibility, reduced compliance burdens, and increased control. Whether it’s through a management buyout, private equity buyout, or merger, the process of transitioning from being publicly traded to privately owned involves a stock buyback and delisting. So, the next time you hear someone mention going private, you’ll be well-equipped to understand what it means and how it works!