going private. what does it take?

let’s imagine you’re the maverick CEO of a large company. it goes public. it is celebrated. but the market doesn’t seem to like the valuation. the share price starts to sink. a few lower circuits later, the valuation of your company is half of what it used to be. that’s a large haircut. but at that price, there are private investors willing to take bets on you. 

and then someone suggests, how about going private again? Can it be done?

a little history

it’s 2018. Elon Musk is yet to become the richest man in the world and his electric vehicle company Tesla is facing a full frontal assault from short sellers on Wall Street. 

then one fine day, Musk decides to take Tesla private at a price of $420/share. he declared it on Twitter and those who were betting against Tesla incurred a paper loss of over $1 billion as then stock rallied. 

finally, the eccentric founder of Tesla was not able to take his company private and instead the US SEC charged him with securities fraud for a series of false and misleading tweets which was later settled for a sum of $40 million. 

but why take a publicly listed company private in the first place?

in an email, Musk explained his rationale. “As a public company, we are subject to wild swings in our stock price that can be a major distraction for everyone working at Tesla, all of whom are shareholders,” he said. “Being public also subjects us to the quarterly earnings cycle that puts enormous pressure on Tesla to make decisions that may be right for a given quarter, but not necessarily right for the long-term,” he adds. 

Musk does have a point here.

what are the benefits?

by going private a company can ignore short-term prospects and obligations and focus on building long-term shareholder wealth.

being private also gives one more freedom to take risks without the scrutiny of the market, media and regulators. private companies are not bound by the pressure of quarterly disclosures. 

when a public company goes private it delists its shares from the various bourses it’s listed on and compensates the public shareholders at a predetermined price.

it’s not easy

it all sounds good. but there are several roadblocks when it comes to going private. delisting is seen as an opportunity to trade because the listed company tries to sweeten the deal by offering a premium on the traded price of its shares. if the company doesn’t compensate the existing shareholders sufficiently then they won’t agree to relinquish their holdings and the company won’t be able to delist. 

when a company delists the investor has an option to offload their shares during the reverse book building process when the acquirer would buy the shares at the fixed price or the shareholders can hold on to their stake and find a buyer on the over-the-counter market. finding a buyer on the market can take time but might fetch you better value if you think the company is bound to improve its value after it goes private.

for retail investors, finding this sweetheart deal is hard. it is difficult to predict which company will delist and when. it’s not smart to go looking for deal such as this but if you do find yourself in one of these situations, you hold some good cards here.