September 7, 2011 | In: General
What Happens to a Stock When Its Company Goes Private?
More and more investors are suddenly finding the company they have shares in going private. What does that mean for the stock and the investors?
Before answering the question, let’s briefly discuss why companies go private. Companies go private for three reasons:
- They believe they have reached a certain level of prosperity that allows them to buy back the debt from the “little” investors so that “big” investors make a ridiculous amount of money.
- They have valid reasons to believe that their stock is being (negatively) manipulated in the public market.
- The main investor(s) want(s) to have full control over the company.
In all cases, going private is not a gesture of love and appreciation to small investors, it’s just a way that big investors can make a lot money.
Companies buy back shares from investors in the following ways:
- They buy them through the cash reserves they have and/or
- They buy them by getting a loan from a bank to finance the buyout of the shares.
When the company uses solely the second method, it generally means that the main investors in the company believe that the stock is negatively manipulated in the public market (otherwise what’s the point of getting a loan to pay back money that bears no interest, unless, of course, there is a plan for a scam), so they decide to get a loan from the bank and buy back the stock at a higher price either to limit their losses or to make some profit.
Now let’s answer the original question, what will happen to the stock and to the investors?
Here’s a step-by-step explanation of what will happen:
- The company decides to go private and decides on the price it will buy back the shares at, usually the company gives a premium of at least 20% over the price of the last trading day.
- Shareholders are given a few days to sell their shares through their broker at the specified price.
- After a few days, the stock will no longer trade on the public market (meaning that the company will delist itself).
- Once the stock is delisted, shareholders are no longer allowed to sell their shares through their broker. The company will then “buy them out” forcefully, which means that the company will contact them and send them a check/cash/wire totaling the price of their shares at the specified price.
- Large investors (those possessing at least 1% of the total shares) may enter into negotiations with the company to own a stake in the company.
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