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

Stock prices can fluctuate during privatization proceedings.

Stock represents ownership shares in a company's financial fortunes. Publicly traded stock is available for purchase on major stock exchanges, such as the New York Stock Exchange and NASDAQ. Privately held companies also issue stock, but those shares are illiquid, with no public market where buyers and sellers can exchange them. If a public company chooses to go private, there are major ramifications for the stock price and for investors.

Procedure

When a publicly traded company agrees to go private, it usually sells shares to an investment group or to another privately held company. Sometimes, the management of the public company itself decides to take the company private by buying all outstanding shares. Most public-to-private conversions are amicable, but sometimes an investment group will make a hostile bid that is not supported by the board of directors. In either case, a company must obtain shareholder approval before it goes private.

Announcement

Upon announcement of a company going private, its publicly traded stock shares often jump in value. A group wishing to take control of a company generally has to offer a premium over the current stock price to convince shareholders and management to agree to the transaction.

Shares usually end up trading slightly below the official offer price of the buyout, as there is always a risk that the deal does not go through. If that happens, the share price usually tumbles back down to where the stock previously traded.

Tender

When a company offers to buy another company, the price at which the deal is announced is known as the tender price. After the board of directors and shareholders agree to the deal, investors tender their shares to an agent of the purchasing company in exchange for the agreed-upon cash amount. Upon receipt of the shares, investors receive a check for the amount of the tender offer.

This procedure is streamlined for investors who work with a financial-services firm instead of keeping their own stock certificates in a safe-deposit box, as the firm can handle all of the paperwork on the client's behalf.

Delisting

After the tender period has elapsed, the stock exchanges will delist the stock, meaning they will stop trading shares of the stock. Although the shares are not technically worthless at this point, because they have no public market, there is no public place to receive any value for them.

Remaining Shares

For investors who neglect, forget, or otherwise do not take advantage of the tender offer, there is some recourse after the shares have been delisted. Each firm has a transfer agent who handles administrative proceedings of the company, such as issuing, canceling, and processing stock certificates. As long as an investor can provide an authentic, numbered stock certificate to the transfer agent, the certificate might be redeemed. However, if the terms of the tender offer explicitly bar shareholders who do not submit their shares on time, the shares will effectively be rendered worthless.

References

• Investopedia: Why Public Companies Go Private
• Securities and Exchange Commission: Going Private
• Forbes: Public Vs. Private Companies
• The Free Dictionary: Going Private
• Securities and Exchange Commission: Transfer Agents