What Is a Take Private Transaction and How Does It Work?

Understanding a Take Private Transaction

A take private transaction involves a publicly traded company transitioning into private ownership. This corporate finance event removes a company’s shares from public stock exchanges, fundamentally altering its ownership structure. The company ceases to be subject to the extensive regulatory and reporting requirements associated with being publicly listed.

Before a take private, a public company has shares widely distributed among numerous investors, including individuals and institutions, which are traded on organized exchanges. Public companies are subject to oversight by the Securities and Exchange Commission (SEC), requiring them to file periodic reports.

Conversely, a private company has its ownership concentrated among a limited number of shareholders, often founders, management, or private equity firms. These companies are not required to disclose financial information publicly or adhere to the same level of regulatory scrutiny. The shift from public to private also changes how a company accesses capital, moving from public stock offerings to private funding rounds or debt financing from banks and private lenders.

Reasons for Pursuing a Take Private

Companies often pursue a take private transaction to escape the intense scrutiny and pressures of the public market. The obligation to meet quarterly earnings expectations can sometimes force management to prioritize short-term financial results over long-term strategic initiatives. Moving to private ownership can alleviate this pressure, allowing management to focus on sustained growth and operational improvements without immediate public judgment.

Reducing regulatory compliance costs is another driver for going private. Public companies incur substantial expenses related to adhering to regulations such as the Sarbanes-Oxley Act (SOX), which mandates strict internal controls and financial reporting standards. These costs include higher audit fees, legal expenses, and the overhead associated with investor relations departments. By going private, a company can significantly reduce these recurring expenditures.

Private ownership also offers companies greater strategic flexibility and agility. Without the need to satisfy a broad base of public shareholders, management can undertake significant restructuring efforts, make bold investments, or pursue disruptive strategies with less public debate or opposition. This environment can be particularly beneficial for companies undergoing a major turnaround or those operating in rapidly evolving industries where quick decisions are paramount.

Executing a Take Private

Executing a take private transaction involves several common financial mechanisms to transfer ownership from public shareholders to private entities. A frequent method is a tender offer, where an acquiring entity, often a private equity firm or a consortium of investors, offers to buy shares directly from public shareholders at a specified price. This offer price is usually set at a premium above the prevailing market price to incentivize shareholders to sell their stock. The tender offer allows shareholders time to decide.

Another common approach is a leveraged buyout (LBO), which often underpins a tender offer. In an LBO, the acquisition of the public company is financed with a significant amount of borrowed money. The assets of the acquired company often serve as collateral for these loans. Private equity firms frequently employ LBOs, using a relatively small amount of their own equity combined with substantial debt to fund the purchase.

Management buyouts (MBOs) represent a specific type of take private where the existing management team, often in partnership with a private equity firm, acquires the company. This arrangement leverages the management’s intimate knowledge of the company’s operations and strategic direction. The procedural steps for these transactions involve extensive due diligence, negotiation of financing, and obtaining necessary regulatory approvals before the final acquisition and delisting of the company’s shares.

What Happens to Public Shareholders

When a company undergoes a take private transaction, the existing public shareholders have their shares acquired, usually through a cash payout. This process ensures that all publicly held shares are consolidated under the new private ownership structure. The acquiring entity, often through a tender offer, will propose a specific price per share, which shareholders can accept by tendering their stock.

The offer price in a take private transaction is almost always set at a premium to the company’s recent trading price. This premium is designed to encourage shareholders to sell their shares. The acquiring entity aims to secure a sufficient number of shares to gain full control and complete the delisting process.

Once the transaction is completed and the acquiring entity obtains sufficient control, the company’s shares are delisted from public stock exchanges. This means the shares are no longer publicly traded, and shareholders who did not tender their shares may be cashed out at the same offer price. For shareholders, the cash payment received from the sale of their shares is generally treated as a capital gain or loss for tax purposes, depending on their original purchase price and the sale price.