The Privatization of a Public Company

Since the dot-com bubble of 1999, more public companies go private each year, according to financial sources like "Business Week" and CNN. Reasons for changing the business structure of major corporations vary from company to company. However, a general trend seems to be because private companies are subject to less regulatory oversight. Management has more leeway to steer the firm in the direction that seems best without constant pressure from shareholders to meet Wall Street expectations. [Reference 1, 2, 6]

Revamping

A floundering public company not meeting the expectations of Wall Street analysts and shareholders may be bought by private-equity investors in an attempt to solve problems and resell. In other words, a public company may go private, hire new management, restructure the company, incorporate a new business plan and take the company public again, all in an attempt to make huge profits for the private investors. In other instances, the privatization of a public company may be the result of a merger or acquisition.

Financing

Private-equity firms can raise capital through lenders and investors to buy up the outstanding shares of a public company, paying stockholders of the public company per share prices that may be significantly above the current market price. This prospect of increased earnings entices shareholders to sell their stock. Many public companies are so large, several firms may need to work together to acquire ownership. Privatizing a public company may not be feasible at the cost of overwhelming debt. In other words, if the private investors must borrow excess funds for the purchase, the newly private enterprise may be strangled with debt from the get-go.

Considerations

Publicly owned companies must abide by a staggering number of regulations. Management is pressured to meet Wall Street's expectations to keep stock prices up and keep shareholders happy. Private companies are just that--private. Management does not have to disclose financial records to the public or, more important, to competitors. One consequence of going private is illiquidity, which means capital may be more difficult to obtain when needed. However, once privatized, management is permitted time to focus on growing the company without strict oversight or sharing profits with thousands of stockholders.

Shareholders

Although a private company may have shareholders, the buying and selling of stock works quite differently from public enterprises. A viable market may not be readily available, making the share illiquid and difficult to cash out easily. Therefore, generally shareholders in a private company expect to profit from the company's long-term performance, not through trading its stock through volatile up-and-down market conditions.

References

• Businessweek; Going Private; February 2006
• CNN Money; Why It Pays to Be Private; Jeffrey Pfeffer; February 2007
• U.S. Securities and Exchange Commission; Going Private: A Reasoned Response to Sarbanes-Oxley?; Marc Morgenstern, et al.; 2004
• U.S. Securities and Exchange Commission; Going Private Transactions, Exchange Act Rule 13e-3 and Schedule 13E-3; January 2009
• U.S. Securities and Exchange Commission: Going Private Rules and Schedule 13e-3
• Washington University in St. Louis; When Public Companies Go Private; Shula Neuman; June 2005