TL;DR:
- Private companies can go public via an IPO, and the reverse can also occur with public companies transitioning back to the private markets.
- There are pros and cons to taking a company private, with a common benefit being that companies are no longer held to rigorous obligations when it comes to financial reporting.
- If a private buyout is approved by a majority of voting shareholders, existing shareholders will be paid out for their shares based on the terms of a tender offer.
We often hear about companies transitioning from private to public through an initial public offering, or IPO. But what happens when public companies transition back to the private markets? Most directly, shareholders might wonder what happens to the stock they hold in a company if it will no longer trade publicly.
Why do public companies “go private?”
Public companies are held to higher standards of financial reporting and disclosures than private companies, given how accessible investment opportunities are to a wide range of people. Since private companies do not list on the public markets, they provide information and reporting to private investors in a due diligence process that takes place between the two parties.
Financial reporting, investor communications, and regulatory compliance can take up significant time and resources for a company; choosing to go private means no longer needing to adhere to time-intensive regulatory requirements. Companies are also often bought out and taken private based on a desire by the purchasing party or parties to take the business in a new strategic direction.
How are companies taken private?
Companies can get taken private in a few ways. One way is through a buyout by a private equity (PE) firm. PE firms provide private financing for companies at various stages, from startups and growth-stage companies to public companies they want to purchase in order to take private and shift strategic direction. In other cases, the purchasing entity can be an ultra-wealthy individual, as is the case with Elon Musk’s bid to buy Twitter for $44 billion, which was accepted by the company’s Board of Directors on April 25, 2022.
A hostile takeover occurs when a buying entity submits a bid that is unwelcome by the current management team and board. Hostile takeovers differ from friendly takeovers in that in the case of the former, the would-be acquirer will go directly to shareholders with a tender offer, or push for a proxy fight to replace the current management team.
Management teams and boards have a fiduciary duty to operate in the best interests of shareholders, which means that if they are presented with an offer that is favorable to shareholders they have an obligation to put the interest of shareholders before their own. A majority of voting shareholders must agree to the terms of a bid before the take-private offer can be finalized.
What happens to my shares if a company goes private?
If a buyout attempt is approved, current shareholders are entitled to receive cash payment for the value of their shares at the purchasing price approved by a majority of voting shareholders. In the case of Elon Musk’s bid for Twitter, the buyout priceaccepted by Twitter’s Board was $54.20 per share, according to an official statement from the company. Usually, a buyout offer will include an acquisition premium which can create a short-term bump in the share price.
It’s important to note that the process for buyouts hardly unfolds as fast as the headlines, and it can take several weeks if not months for shareholders to feel the effects of a company they own going private.
What will I see in my Public account when a company goes private?
Once a buyout is approved by shareholders, the sale price per share is locked per the agreed upon terms of the tender offer. If you hold stock in the company, your shares will be sold and you will see a cash balance in your account for the value of your shares. The stock page for the company in the Public app will eventually go away, and shares will no longer be publicly-tradable assets.
For shares you’ve held less than one year, any profits from the sale will be taxed as short-term capital gains. Shares held for longer than a year will be taxed as long-term capital gains.
The privatization process can sometimes take several weeks or even months to complete.