Going Private

Going Private is the transformation of a Public Company—one whose shares are traded on a Stock Exchange—into a Private Company. This corporate maneuver happens when a group of acquirers, typically a Private Equity firm or the company's own management team, purchases all the company's outstanding shares, effectively taking it off the public market. Once the transaction is complete, the company's stock is no longer available for trading by the general public, and it is delisted from exchanges like the New York Stock Exchange (NYSE) or NASDAQ. This process fundamentally changes the company's ownership structure and frees it from the rigorous reporting requirements and shareholder pressures that come with being public. For existing investors, a going-private announcement is a pivotal event, often forcing them to sell their shares and exit their position in the company.

You might wonder why a company would want to ditch the prestige and capital-raising power of the public markets. The reasons are almost always strategic and financial, aimed at unlocking long-term value away from the public's watchful eye.

• Freedom from Scrutiny: Public companies live in a fishbowl. They are legally required to report their financial results every quarter, leading to immense pressure from Wall Street analysts and investors to meet short-term earnings targets. By going private, a company escapes this quarterly earnings hamster wheel, allowing management to focus on long-term goals, even if it requires short-term pain.
• Significant Cost Savings: Being public is expensive. Companies pay hefty fees for exchange listings, regulatory compliance (such as the detailed reporting required by the Sarbanes-Oxley Act), investor relations, and shareholder communications. Going private eliminates these costs, freeing up cash for operations or investment.
• Strategic and Operational Flexibility: Imagine trying to renovate your house with a hundred different people looking over your shoulder, critiquing every nail you hammer. That's what it can feel like to restructure a public company. As a private entity, management can make bold, necessary changes—like selling off a division, investing heavily in new technology, or overhauling its business model—without needing to justify every step to thousands of Shareholders.
• Exploiting Undervaluation: This is where it gets interesting for value investors. Sometimes, an acquirer believes the stock market is deeply undervaluing a company. They see a fantastic business trading for a fraction of its true Intrinsic Value. By taking it private, they can buy the entire company on the cheap, work on improving it behind the scenes, and potentially bring it back to the public market years later via an Initial Public Offering (IPO) at a much higher valuation.

The process isn't as simple as just deciding not to be public anymore. It's a major financial transaction that requires convincing all the existing owners—the shareholders—to sell.

The buyout is typically led by one of two groups:

• Private Equity Firms: These are investment firms that specialize in buying companies. They often use a technique called a Leveraged Buyout (LBO), where they borrow a large amount of money (leverage) to fund the purchase, using the target company's own assets and cash flows as collateral for the loans.
• Company Management (or a Founder): When the company's own leadership team leads the buyout, it's called a Management Buyout (MBO). Who knows the company's potential better than the people running it? They might partner with a PE firm to get the necessary financing.

While the details can vary, the typical steps look like this:

1. The Offer: The acquirer makes a formal proposal to buy all publicly held shares at a specified price per share. This is usually done through a Tender Offer, where they “tender” an offer directly to shareholders. To entice shareholders to sell, the offer price is almost always set at a premium to the current market price.
2. The Vote: The company's board of directors reviews the offer. If they approve it, the proposal is put to a shareholder vote. A majority of shareholders must agree to the deal for it to proceed.
3. The Squeeze-Out: Once the deal is approved, the transaction closes. Shareholders receive cash for their shares, and their ownership is extinguished. The company files paperwork with regulators like the Securities and Exchange Commission (SEC) to terminate its public reporting status. The company is now officially private.

For a value investor, a going-private deal can be a double-edged sword. It's the ultimate validation that a company was undervalued, but it can also cut your investment journey short.

• The Good: A Forced Gain at a Premium

If you bought shares in a company because you believed it was worth $50 when it was trading at $30, a private equity firm coming in with an offer to buy it for $45 is a fantastic outcome. The deal validates your thesis and hands you a tidy profit without you having to wait for the market to slowly come to its senses. It's a forced, and often fast, realization of value.

• The Bad: Cashing Out Too Cheaply

The flip side is that the acquirer is also a value hunter—and they're trying to get a bargain, too. The $45 offer might be a nice premium over the market price, but it's still less than your $50 estimate of intrinsic value. Because buyout deals require majority approval, you, as a minority shareholder, are forced to sell at the offer price even if you believe the company is worth far more. Your potential for further gains is capped.

• What's an Investor to Do?

When a buyout offer is announced, it's time to reassess.

1. Is the price fair? Compare the offer price to your own calculation of the company's intrinsic value.
2. Is it a “done deal”? Sometimes rival bidders emerge, pushing the price higher. It can be wise to wait and see how things play out.
3. Know your rights. In some jurisdictions, shareholders who vote against a merger may have Appraisal Rights, which allow them to ask a court to determine a “fair price” for their shares. This is a complex legal path but is a tool that exists to protect minority investors.

Ultimately, a going-private transaction is a powerful reminder that in investing, price is what you pay, but value is what you get. An offer to take a company private forces the question of whether the price being offered is a fair reflection of the company's true value.