What Happens to Stock Price When a Public Company Goes Private?

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An initial public offering (IPO) of a company's shares is the means by which a private company "goes public." That same company becomes a private company once more when one or more investors acquire the majority of the company's shares. This transaction de-lists the company's shares from a public exchange, which effectively takes the company private.

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The privatization of a company takes place for many reasons. It's typical, however, for privatization to occur as a result of the market's undervaluation of the business, which results in the securities no longer being widely held. The end result, however, is typically a premium per share that's paid to shareholders as a means to ensure they accept the offer.

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The Privatization of a Company

The transition of a public company to a private one occurs less frequently than does the transition of a private business to a public one. In any event, the process of converting a public company to a private one is more straightforward than taking a private company public. The is due in part to the standards and regulations imposed by the Securities and Exchange Commission (SEC) on the initial public offering of a company's shares.

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In many cases, a number of investors will tender an offer for a company's shares. That offer includes the stipulation of the price per share the investors are willing to pay to acquire a certain number of the company's shares. If this offer is accepted by the majority of the company's shareholders, the investors who made the offer pay the consenting shareholders the agreed-to price per share.

Investor Offer to Shareholders

For instance, assume a consenting shareholder owns 1,000 shares for which the current market price is $30 per share. In this case, the shareholder will receive $30,000. In turn, the shareholder will relinquish her shares. It's likely that the investor will pay a premium above a share's market value to ensure the existing shareholders will accept the offer. Typically, the premium paid is 20 to 40 percent above the current stock price. For example, the premium would be between $6 and $12 per share.

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Public Companies That Go Private

While "taking a public company private" is not the norm, investors in some well-known companies have done so. These companies include Hilton Worldwide Holdings, H.J. Heinz and Dell Computers.

In October 2021, the Financial Times reported that for U.S. firms, the premiums are as high as 42 percent for the year. The 2021 premiums are the highest that have been paid since 1999.

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Benefits of Privatization

Existing public company shareholders benefit from the privatization of the company due in part to the willingness of investors to pay those shareholders the market price per share plus a premium per share. Other benefits include the ability to disregard some administrative, financial reporting, regulatory and corporate governance requirements of a public company. Also of consequence is the ability of a company to focus more on operating and growing a company, rather than earning a profit.

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For instance, private companies evade some compliance and administrative rules imposed by the Sarbanes-Oxley Act of 2002 (SOX.) For example, a private company is not required to adhere to Section 404 of the Act, which requires a company to implement, document and test internal controls that relate the company's financial reporting.

Pursuit of Company’s Privatization

A public company's leadership might pursue the privatization of the company. For instance, the founder and CEO of Tesla (TSLA,) Elon Musk, announced that he was considering the possibility of taking the company private. At the current time, however, Tesla continues to operate as a public company.

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Following Musk's announcement, Tesla's stock immediately rose in value by 6.42 percent. In response to Musk's announcement, the Securities and Exchange Commission filed a complaint against Musk stating the CEO voiced a series of false and misleading statements. The SEC also filed a complaint against Tesla stating Tesla failed to implement disclosure controls or procedures to assess whether the information that Musk relayed should have been disclosed in reports. In February 2020, Tesla and Musk paid $40,000,000 in civil penalties.

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