What happens to stock when a company goes private?


Casper Sleep in mid-November 2021 announced it was going private after less than two years on the public market. There are a number of reasons companies go from public to private, but one thing remains consistent: Shareholders get paid.

Here’s what to know about stock when a company privatizes, including special shareholder elections, tender offers, payouts for outstanding shares, and last-minute buy-ins.

TL;DR

  • Companies like Casper Sleep and Goodrich Petroleum Corp. decided to go private in 2021.
  • Often, a company goes private by getting bought out by a private firm. Shareholders must approve the offer for a company to go public-to-private.
  • The company going private sets a value for the cash buyout of outstanding shares, usually at a premium of the stock’s market value at the time of the announcement.
  • If the premium is high enough, investors can buy into the stock after the public-to-private announcement and still profit at the time of the buyout.

Recent privatizations show what can happen when a stock delists

IPOs (initial public offerings) are much more common than public-to-private maneuvers. Still, there are some notable examples in recent stock market history.

Known for its mattresses, Casper stock went to sleep quickly, lasting just a year and nine months on the market. From the time it went public in February 2020 to the time it announced a private buy-out from Durational Capital Management on November 15, 2021, the stock lost 67.87% of its value. The company ultimately decided to go private to salvage its capital.

“This agreement offers a promising opportunity to realize the highest value for our stockholders while providing Casper with much needed capital to execute on future initiatives to sustain and grow its business.” – Casper co-founder and CEO Philip Krim 

Even more recently, Goodrich Petroleum Corp. announced a private buyout by Paloma Partners VI Holdings LLC.

Panera Bread went private in 2017 but has since announced it plans to go public once more in a traditional IPO that’s backed by a SPAC (special purpose acquisition company). As of November 2021, Panera’s return to the public market hasn’t been made definitive.

Krispy Kreme went private in 2016 after years of controversy. In 2000, the Krispy Kreme accounting scandal took center stage; the company manipulated earnings per share (EPS) by setting analyst targets themselves and beating them by a single penny. Former CEO Scott A. Livengood also altered accounting reports during the 1990s and early 2000s. Once JAB Holding Company bought Krispy Kreme in 2016, it went private. The donut chain has since reentered the public market under the catchy ticker “DNUT.”

Going public to private requires shareholder approval

In order to go private, a public company must host a special election for institutional and retail investors to vote on. Any investor who owns voting stock in the company is able to vote, but institutional shareholders tend to hold much larger amounts of stock that represent a larger portion of the vote.

The company proposes something called a “tender offer” for a minimum of 20 days to ensure everyone has a chance to vote. The tender offer is the company’s request to purchase all outstanding (aka sold) shares at a certain value, which is usually higher than the current share price. The SEC defines a tender offer as “a public bid for stockholders to sell their stock.”

Investors can reject the tender offer, but institutional shareholders are more likely to impact the final vote. Companies can take legal action if an investor rejects a tender offer to buy outstanding shares and go private.

Once approved, a company buys outstanding stock

In the case of Casper Sleep, shareholders approved the tender offer for the company to buy out shares at a 94% premium of the stock’s closing price on November 12, 2021. That’s a huge leap in value made possible by Casper’s acquisition by a private firm. Naturally, investors were gung-ho about the move, considering CSPR stock wasn’t doing it for their portfolios to begin with.

Any time a company goes private (and for whatever reason), a company buys out all outstanding shares at a specified value. Shareholders who own stock at the time of it going private earn cash for their positions based on the agreed-upon rate.

Outstanding share payouts: What they mean and how to get them

A company typically announces its stock is going private well before the process is done. Once the company is officially private, cash payouts for outstanding shares occur automatically. Investors can see the cash value of their position reflected in their brokerage account that they held the security in.

Should you buy a stock after its public-to-private announcement?

When Casper Sleep first proposed a private buyout of all of its publicly traded stock, the 94% premium was enough to have some investors drooling. It wasn’t just existing investors who were excited, but incoming investors, too. As early as pre-market the following trading day, trading volume and market value increased rapidly. CSPR stock increased 88.45 percent overnight with retail investors inching toward that premium.

You can buy in before a stock officially goes private, but you should analyze the tender offer before making that decision. 

Whether or not to buy a stock after its public-to-private announcement depends on two things: 

  1. The cash value that the company is offering in exchange for shares
  2. The current market value of the stock

Investors must time the market well and make sure they’re not overpaying for a stock whose buyout value is already capped. Placing limit orders that only process if the market value is below a certain amount can help investors buy in at the right price.

What happens to stock options when a company goes private?

There are a few outcomes for stock options when a company goes private.

Stock options holders could receive a cash payment for cancelled shares or have their shares substituted to a successor entity. If you work for a company when this happens, the company may accelerate or terminate your vesting plan. Employees may also receive private stock options in lieu of public stock options.

If you’re a shareholder and your options are underwater—or the strike price is greater than the fair market value—your position will go worthless unexercised.

Bottom line

For some companies, the public market can feel like the ultimate end game. But it’s not right for every entity, as proven by all the public companies that have decided to go private. In some cases, a dwindling stock price or troubled corporate finances is not worth its weight in ticker symbol bragging rights.

Rachel Curry is Pennsylvania-based content writer and journalist talking all things finance. She likes to give meaning to numbers by humanizing them. You can connect with her on Twitter at @writingsofrach.

The above content provided and paid for by Public and is for general informational purposes only. It is not intended to constitute investment advice or any other kind of professional advice and should not be relied upon as such. Before taking action based on any such information, we encourage you to consult with the appropriate professionals. We do not endorse any third parties referenced within the article. Market and economic views are subject to change without notice and may be untimely when presented here. Do not infer or assume that any securities, sectors or markets described in this article were or will be profitable. Past performance is no guarantee of future results. There is a possibility of loss. Historical or hypothetical performance results are presented for illustrative purposes only.

Tweet