What Happens When a Public Company Goes Private?

Mansi Maheshwari Mansi Maheshwari
Jun 3, 2022 6 min read
What Happens When a Public Company Goes Private?

What happens when a public company goes private? Why would a publicly-traded company make that decision? What are its options once it does? It's difficult to know how to answer these questions if you have no background information on the subject. To help you get some insight into what happens due to these transactions, we've collected seven pointers about going private and provide some insight into what happens due to these transactions. Hopefully, this guide answers your questions and helps you understand what happens if a publicly-traded company decides to pursue another route.

When a Public Company Goes Private:

The company is removed from the stock exchange

No. of Companies listed on Stock Exchange in India
No. of Companies listed on Stock Exchange in India

Once a company goes private, it's removed from the stock exchange. Investors will no longer be able to purchase or sell shares in the company through a major stock exchange.

The company's management team may still hold on to some of their shares, which they may sell in the future for a profit. But for most investors, this is the end of their involvement with the company.

The company's shares are withdrawn from the stock market

When a publicly-traded company goes private, its shares are withdrawn from the stock market. This is a major shift for investors, who are used to seeing their investments on display on the stock exchange.

Management often decides to go private, but investors can also initiate it. In some cases, an investor may buy out other shareholders and control the company. In other cases, multiple investors pool their resources and buy out existing shareholders.

Existing Shareholders get paid

When companies go private, their shareholders can receive various payout options. These include:

  • Cash payments to each shareholder, based on the number of shares they own. The payout can either be in one lump sum or spread over time.
  • Stock in a new company is formed when the parent company goes private. This stock could pay dividends or be sold for cash later.
  • New shares in the parent company that's going private. Once those shares become publicly traded again, it's possible for investors who hold them to make money off their original purchase price or by selling them at some point down the line.

List of All the Upcoming IPOs in India 2022
2021 was the year full of new startup IPOs from Zomato to Nykaa. 2022 also has many new listings, take a look at companies going public in 2022.

The company no longer releases financial statements to the public

Once a company goes private, it no longer releases financial information to the public. This means that investors who had previously owned shares of the company in question will no longer have access to any information about its finances or performance. However, this does not mean that the company goes completely dark: companies can still be purchased and sold by other companies using private transactions, which means that their financials are still available to their owners.

The only major difference is that these transactions are not recorded on any stock exchange. Instead, they must be reported to regulatory bodies such as the Securities and Exchange Board (SEBI), allowing them to track how many outstanding shares exist within the private sector.

Fewer regulatory requirements and obligations

By going private, a publicly-traded company no longer has to deal with the many regulatory requirements of being a publicly-traded company. These include:

  • Annual reports: are required for publicly-traded companies and must be submitted to the SEBI.
  • Audited financial statements: audited financial statements must be submitted to the SEBI for publicly-traded companies. This requirement helps ensure that investors access accurate information about their investments.
  • Required disclosures: publicly-traded companies must disclose information about their operations and management team to the public via annual reports and other filings with the SEBI.
  • Corporate governance: corporate governance refers to how businesses are run internallyβ€”for example, whether shareholders have voting rights over key decisions made by management, who sits on boards of directors at large companies.

Less capital available

The reason for this is simple: a public company must disclose its financial statements, which means anyone can access them. This is great for investors who want to get in on the action and make money from their investments. Still, it's not so great for companies that want to be able to keep their financials secret to protect proprietary information or avoid scrutiny from government regulators.

By going private, companies can keep their financials under wraps and more of their profits for themselves!

A public company that goes private no longer has to contend with quarterly pressures.

Public companies are accountable to their shareholders, who demand that the company generate quarterly revenue and profit. These demands make it difficult for companies to focus on long-term goals, often leading to short-term planning and poor decision-making.

Private companies have more freedom: they can focus on their long-term goals without worrying about those pesky quarterly reports!

More flexibility

When a public company goes private, it gains more flexibility in its operations. This means that the company can make decisions that may be unpopular with investors but which are better for the business's long-term health.

For example, a public company might cut costs to boost profits and increase shareholder value. This could involve layoffs or outsourcing certain aspects of operations. However, when a public company goes private, they no longer have to worry about shareholder concerns and can focus on what is best for the business as a whole.


List of All the Upcoming IPOs in India 2022
2021 was the year full of new startup IPOs from Zomato to Nykaa. 2022 also has many new listings, take a look at companies going public in 2022.

Conclusion

There is a lot at stake when a public company goes private.

So there you have it, folks. That's what happens to a company when it goes private. Of course, this article is only meant to be a general overview of the process. It may be worth learning more about private equity firms and the going-private phenomenon in general; then, you should do further research on those topics.

This post's subject can be applied to almost any situation involving a significant change in company ownership and structure. While there are many options that can be pursued when taking your company public or private, keep in mind the information above: timing and valuation matter. If you're ready to make the leap, talk to an investment banker or investment broker/advisor, they can help!

FAQs

What is privatization in public sector?

Privatisation of public sector means the transfer of ownership, management, and control of the public sector enterprises to the private sector.

Which sectors are privatised in India?

The sectors privatised in India are:

  • Atomic Energy
  • Space and Defence
  • Transport
  • Telecommunications
  • Power
  • Petroleum
  • Coal and other minerals
  • Banking, insurance, and financial services

What happens if public company goes private?

When a Public Company Goes Private:

  • The company is removed from the stock exchange
  • The company's shares are withdrawn from the stock market
  • Existing Shareholders get paid
  • The company no longer releases financial statements to the public

Which are the public companies that went private?

Some of the popular public companies that went private are:

  • Twitter
  • Dell
  • Burger King
  • Hilton Worldwide Holdings
  • Reader’s Digest

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