Going private is a term used to describe a transaction (or series of transactions) with a controlling stockholder or other affiliated person(s) that reduces the number of stockholders of a public company, allowing the company to terminate its public company status and related reporting obligations.
The most common types of going private transactions are:
- Acquisitions by a controlling stockholder of a subsidiary with publicly traded shares (these transactions are also commonly referred to as squeeze-out mergers).
- Acquisitions by a significant but non-controlling stockholder.
- Leveraged buyouts by a private equity fund or other third-party acquirer working with management.
There are many reasons why it may make sense for a public company to go private. For example, a going private transaction might
- Permit a controlling stockholder and its publicly traded subsidiary to integrate their operations more efficiently and effectively, without concerns for fairness to other stockholders.
- Allow management to focus on long-term objectives rather than short-term profits to appease markets.
- Permit the public stockholders to realize a better price for their shares than they would realize from continuing to hold the shares or selling in the market, perhaps due to low trading volumes, lack of analyst coverage or lack of any other buyer (particularly if there is a controlling stockholder that would be unwilling to sell its shares).
- In the case of a leveraged buyout, allow the acquirer and target to realize the tax benefits of a more leveraged capital structure than would be acceptable for the target as a public company.
- Enable the company to save costs and avoid the disadvantages of complying with the requirements of the Exchange Act, which require, among other things, periodic disclosure of what may be competitive or strategic business information and impose inflexible corporate governance requirements.
- Reduce the distraction (and litigation) that can result from dissatisfied public stockholders.
- Realize the benefits of consolidation for tax and/or accounting purposes.
However, companies that go private may face disadvantages, including loss of visibility and the inability to quickly tap the public markets for debt or equity financing or offer a liquid acquisition currency.
During the 1980s many dozens of publicly traded companies gave up their public status and returned to being privately held companies. These transactions are known as management buyouts (MBOs) or leveraged buyouts (LBOs). In buyouts, a small group of investors, usually including the company’s managers, use a relatively small equity investment combined with enormous loans to buy all of a company’s outstanding stock. Once the buy-out group owns the stock, they de-list the firm and make it a private, rather than a publicly traded, company, which is the origin of the term going-private trans-actions. The combination of high debt, with its threat of bankruptcy, and managerial stock ownership create powerful incentives for managers to improve the company’s performance.