What Is Going Private?
Going private means converting a publicly listed firm into a private entity. When a corporation turns private, its shareholders cannot exchange their shares on the open market.
Several forms of going private deals exist, including private equity, management, and tender offers.
How Privatization Works
A corporation usually becomes private when its shareholders believe it no longer benefits from being public.
One option to transition is through a private equity takeover of the firm. In this deal, a private equity fund acquires a controlling stake in the company, generally using large debt. Thus, the private equity firm secures these loans against the purchased company’s assets. Businesses use cash flows to pay debt interest and principal.
The management buyout, in which the company’s management team privatizes it, is another common tactic. Both management buyouts and private equity buyouts need a lot of debt. However, unlike a private equity buyout, “insiders” who know the firm do a management buyout.
Going private may entail seller financing when the company’s owners (this time, the publicly listed corporation’s shareholders) help the new purchasers fund the purchase. This usually involves letting the buyer defer part of the purchase price for five years.
Going private can require large debt. The acquired company’s assets secure loans in these cases, and its cash flows pay debt payments.
A tender offer is a frequent form of going private. This occurs when a corporation or individual publicly offers to acquire most or all of its shares. The target company’s management may accept tender proposals even if they don’t wish to sell. In this case, the tender offer is considered a hostile takeover.
Public corporations generally finance tender bids with a mix of cash and shares. Company A can give Company B shareholders 80% cash and 20% Company A shares in a tender offer.
Actual Going Private Transaction
Private equity firm JAB Holding Company announced its acquisition of Keurig Green Mountain in December 2015. This was an all-cash offer, unlike typical private equity buyouts.
The offer valued the shares at $92, about 80% above their pre-announcement market value. As expected, share prices surged sharply after the announcement, and the corporation accepted the offer immediately.
The acquisition closed in March of the following year. Keurig Green Mountain became a private firm when its shares stopped trading.
Conclusion
- A going-private deal converts a public corporation into private ownership.
- Management buyouts, private equity buyouts, and tender offers are examples.
- Going private can require large debt.
- The purchased company’s assets and cash flows pay down such obligations.
