Going Private

Definition

Going private is a financial strategy wherein a company’s majority shareholders buy back its shares to gain complete control and ownership. This means the company will no longer be publicly traded on the stock exchange. This strategy is usually executed to avoid the regulations and scrutiny faced by publicly traded companies.

Phonetic

The phonetics of the keyword “Going Private” is: /ˈɡəʊɪŋ ˈpraɪvət/

Key Takeaways

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Regulatory Freedom: Going private can exempt a company from many regulations that govern public companies, reducing a significant amount of compliance costs and administrative overhead.
Increased Flexibility: Being private allows a company to operate with greater flexibility. Decision-making can be faster and more efficient since it doesn’t need to be subjected to shareholder votes or public scrutiny.
Long-term Planning: Without the consistent pressure from shareholders to meet quarterly expectations, privately held companies can focus on long-term value creation and strategic planning, benefiting the organization in the long run.

“`This will render as:1. **Regulatory Freedom**: Going private can exempt a company from many regulations that govern public companies, reducing a significant amount of compliance costs and administrative overhead.2. **Increased Flexibility**: Being private allows a company to operate with greater flexibility. Decision-making can be faster and more efficient since it doesn’t need to be subjected to shareholder votes or public scrutiny.3. **Long-term Planning**: Without the consistent pressure from shareholders to meet quarterly expectations, privately held companies can focus on long-term value creation and strategic planning, benefiting the organization in the long run.

Importance

The business/finance term “Going Private” denotes an important strategic move for publicly traded companies. It refers to the process wherein a publicly traded company converts to a private one, by buying back its outstanding shares from the public stock market to reduce the number of shareholders. The concept is important because it often indicates a significant shift in a company’s financial management and operational strategy. Going private can offer several advantages, such as greater operational flexibility, reduced regulatory scrutiny, and less pressure from shareholders for short-term financial performance. It allows the management to have greater control and focus on long-term strategies. However, it’s a complex process and involves intricate financial restructuring, making it a critical term in the realm of business and finance.

Explanation

The act of “Going Private” often serves a multitude of purposes that are primarily centered around management and financial restructuring. Companies usually opt to go private when they aim to reconfigure their ownership model to address certain challenges, or take advantage of specific opportunities that can’t be as accessible within the constraints of public ownership. Shareholders of public companies are often focussed on short-term returns, which could pose significant obstacles for the management who wish to make long-term strategic decisions. By going private, the company can focus on long-term goals without the pressure from shareholders to deliver quarterly earnings.It can also cater to financial objectives. Public companies face significant expenses related to regulatory requirements, including costs associated with financial reporting and corporate governance compliance. Going private can alleviate these responsibilities, saving the company a good deal of resources. Furthermore, it can also shield companies during periods of financial turbulence. During such times, the company’s stock may be undervalued, and by going private, the organization can avoid the detrimental impacts of market volatility. In all, the act of going private is undertaken to bolster a company’s ability to manage its operations more effectively and achieve its financial objectives efficiently.

Examples

1. Dell: In 2013, the PC maker company Dell went private under the leadership of its founder Michael Dell and private equity firm Silver Lake Partners. Michael Dell was dissatisfied with the company’s performance and stock price, so he decided to buy back the company’s stock, taking it private to allow for more flexibility and freedom in business decisions.2. Panera Bread: In 2017, JAB Holding Company, a private firm, bought Panera Bread for about $7.5 billion, hence making it a private company. The decision to go private was taken to focus on long-term strategies without the immediate pressure of producing quarterly results as required from public companies.3. Kinder Morgan: In 2007, Kinder Morgan, one of North America’s largest energy infrastructure companies, went private through a management-led buyout. The management, along with a consortium of private equity, bought out public shareholders for $22 billion. It later re-entered the public market in 2010 via an initial public offering.

Frequently Asked Questions(FAQ)

What is the term ‘Going Private’ in finance and business?

‘Going Private’ refers to the process where a publicly traded company is converted into a private one. This usually occurs when a company’s shares are bought out by a single entity or a consortium, thus eliminating the need for public trading.

Why would a company choose to ‘Go Private’?

A company might choose to go private for various reasons. These could range from reducing the pressure for short-term financial results, lessening the regulatory scrutiny, attaining better control over the company’s future, or availing the opportunity for the firm’s management to take significant equity stakes in the company.

What is the process of ‘Going Private’?

The process typically involves a buyout by a private equity firm or the existing management of the company. The buying entity offers to purchase outstanding shares from shareholders at a premium. Shareholders can either accept or reject this offer.

Who benefits from a ‘Going Private’ transaction?

Ideally, all involved parties benefit from a ‘Going Private’ transaction. The buying entity gains full control and decision-making abilities. Shareholders usually receive a premium for their shares than the current market price. However, it ultimately depends on the specific circumstances of each transaction.

Can a private company go public again after ‘Going Private’?

Yes, a company that has gone private can decide to go public again. This process is often called an Initial Public Offering (IPO).

What are the possible drawbacks of ‘Going Private’?

While ‘Going Private’ has its advantages, there could be potential drawbacks. These may include a loss of liquidity for shareholders since they can’t sell shares freely on the open market, existing shareholders might be forced to sell their shares if a majority has voted for the deal, and additional debt is often used to finance buyouts which increases financial risk.

Are ‘Going Private’ transactions common?

While not as common as public offerings, ‘Going Private’ transactions do occur regularly, especially in situations where the management or a group of investors believe the company is undervalued on the public markets.

Related Finance Terms

Buyout
Share Repurchase
Delisting
Leveraged Buyout (LBO)
Minority Shareholder

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