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Why Do Public Companies Turn Into Private Companies? – Going Private

calendar13 Feb, 2023
timeReading Time: 4 Minutes
Why Do Public Companies Turn Into Private Companies? – Going Private

Going private would attract many debts as all the lenders and released shareholders will have to be paid back by the company, so the company would use its assets and reserves to pay back the debtors. The shares and other securities are no longer tradeable in the market and will be bought back by the company which means it is planning to go private. Privatization might be decided due to many reasons, one of them could be losses. In this blog we will discuss about Going Private.

What is a Public Company?

A public company deals with the stock exchange and its shares are listed there, people can buy and sell the securities of a public company on the stock market.

Being a public company means having more prestige as the company deals on a large scale and some are that large that they are even enlisted on the New York stock exchange. So it clearly implies that there is a large amount of profit in public companies.

Being a large-scale company undoubtedly means earning larger profits but along with that it also has a high standard of regulatory and corporate governance, due diligence, pre and number of post incorporation compliances as well.  Public companies need to implement a lot of internal controls, auditing, bord meetings, quarterly reports, etc.  As imposed by the Sarbanes-Oxley Act, 2002[1], which requires excessive control and internal management in companies.

Public companies have to meet the wall street’s quarterly earning expectations, which requires the company to do financial and accounting engineering. Due to this public companies had to focus on short-term fulfilments rather than focusing on long-term goals, which leads to  loss in research and developments.

What Would Going Private Mean?

You check the meaning of Going Private mean in detailed form:

  • Private Equity Buyout:

Going private would mean acquiring a public company by private group. Public companies are often at large scale and their holdings, debts, etc. account in billions of dollars, to acquire a company which is at such a large scale is difficult. So, in order to acquire them a private venture or group of private firms would seek help from banks and financial institutions. After acquiring the public company, its assets and cashflow can be used to release the loan.

Now the equity group will have the cash reserves and the profits of the company and will use it to pay off the loan and the interest on the loan besides that they will also have to provide the investors with a return as capital gain from the remaining cash flow.

While the market is in boon period, there will be many privatizations, as the lending institutions will be providing loans on lesser interest to generate cash flow in the market. The private entities will now lay out their future plan of how they will satisfy the prospective shareholders and their goals and objectives. This process is called private equity buyout.

  • Management Buyout:

It is no doubt that privatizing involves high finance, and not every time privatization is done only via private equity buyout. In management buyout the management of the public company buys the entire company and privatizes it. The management is well known for the funds and the cashflow of the company and uses that information to buy out the company. In such cases the owners of the company themselves help the management to buy the company as obviously it involves huge amount of financial transactions.

They are even awarded a period of five years to make delayed payment for the acquisition of the company by keeping the assets of the company as collateral.

  • Tender Offer:

A tender offer involves buying most of the public company shares by another company. Due to buying of maximum no. of shares the company’s ownership and management control is transferred to the majority shareholder, and this can also take place even if the company’s management is present and does not want to do so. This is also called hostile takeover.

Benefits of Privatization – Going Private

Following are the benefits of Privatization:

  • There is a no. of benefits behind privatization the company is now free from submitting quarterly reports to the wall street, because of which they had to focus on the short-term goals rather than focusing on the long-term targets which would actually help the company to maintain its reputation and existence in the long run.
  • The companies will be free from excessive internal regulations which are to be submitted according to the SOX act, 2002. There was excessive control and regulations on the companies, which was necessary because of their being a large-scale company but this somewhere interferes with the more important tasks from the company’s owner’s point of view.
  • Privatization also helps a public company who is under losses, and can’t pay dividends to its shareholders. By privatization the shareholders and all other lenders of the company will be settled.

There are a number of compliances need to be followed by a public company as it manages huge number of investments and has huge responsibilities over.

Demerits of Privatization

Following are the demerits of Privatization:

  • If there is a big takeover, it might turn the economy upside down at once, it would hike up the stock value to such an extent that it might cause excess release of funds into the market by purchasing the shares, which could even lead to depreciation of currency.
  • Another disadvantage of privatization is that the public company will no longer be listed with the stock exchange and the prestige it gained over the years might be impacted due to change in general investors head that it might not be that safe to invest huge funds in public companies. The company wouldn’t even be able to focus on long-term goals and research and development will get hampered due to the privatization.

Conclusion

For many publicly traded firms, going private is a desirable and practical choice. While less legal and reporting obligations for private firms might free up time and money to concentrate on long-term objectives, being bought can result in large financial gains for shareholders and CEOs. Operating and managing a private company frees up management’s time and energy from compliance requirements and short-term earnings management and may provide long-term benefits to the company and its shareholders as long as debt levels are reasonable and the company continues to maintain or grow its free cash flow.

Read Our Article: Public Limited Company Registration Process In India

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