Well, there are a number of reasons why a company may decide to go private. Today, we’ll examine the major ones and show you the pros and cons of such an important transition.
What to expect being public
Let’s face it, there are advantages and disadvantages to going public. On one side, investors holding stocks in public companies have liquid assets. It is relatively easy to sell or buy public companies shares. On the other side, there are huge amounts of various bylaws and financial and administrative regulations that public companies are obliged to comply with. All these complicated regulations may distract the management from the company’s development and growth.
Besides the strict internal control of the companies’ financial reporting, public businesses must perform operational and financial engineering in order to satisfy Wall Street’s earnings expectations on a quarterly basis. This may shift the company’s focus from achieving the longer-term and eventually more important goals towards trying to show better short-term results.
Going Private. Why not?
Private companies’ investors may or may not have liquid investments. Private structure gives the companies’ owners more freedom to spend their time and efforts on improving and developing their business and making the company more competitive on the market.
Usually, private firms have investments with various exit timelines, depending on what was conveyed to and agreed with the investors. Though typically, the investment holding period lasts from four to eight years. This is a rather long period that allows business owners to concentrate on building long-term shareholder’s wealth.
A company’s management prepares and shows a business plan to the prospective shareholder(s) and coordinates the plan going forward. This plan basically depicts how the company is going to return the investments.
Going Private. Let’s see how
The ‘take-private’ transaction presupposes that a rather large private equity group or joint consortium of private firms buys the stocks of a publicly traded company. Due to the fact that public companies have huge annual revenues of millions and billions of dollars, the acquiring private equity group usually have to secure its financial capability with the help of the investment bank or another lender, who is able to provide large enough loans to finalise the deal.
Then the newly obtained operating cash assets can be utilised to repay the debt for the acquisition transaction. Sufficient shareholders’ returns are also a must-pay for the equity group.