Why do Public Companies Go Private?

Last Updated at: Oct 20, 2020
As per EPFO, in the current scenario the businesses and enterprises are not able to function normally and are facing liquidity or cash crunch to pay their statutory dues even though they are retaining the employees on their rolls.


Recently, Elon Musk, the man behind Tesla is hitting the headlines very often. Last year, he conveyed his intention of wanting to take Tesla private hinting that it could be the largest corporate acquisition ever. Now, you could be wondering why all public companies want to get privatized. Well, here we have the reasons for the same.

Elon Musk had sent the markets and the media into a frenzy by tweeting he wants to take Tesla private. With a $70 billion price tag, Tesla’s could be the largest corporate buyout ever.

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So the one question that is on the mind of everyone is, why do public companies go private?

But first, the reason why companies go public. Companies usually go public to raise capital in the hopes of expanding. Venture capitalists and private equity firms may use IPOs as an exit strategy, i.e. a way of getting out of their investment in a company and enabling them to get returns.

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However, Elon Musk won’t be the first founder wanting to take his company private. The most famous delisting in recent times was of Dell Computers and the largest company in terms of revenue to go from public to private, completing its buyout in October 2013.  Michael Dell, the company’s founder and CEO – who founded the company in his dorm room – and Silver Lake Partners took the company private for $24.4 billion. Dell is one of the largest technology companies in the world, employing more than 103,300 people in America and around the world.

So why do public companies go private?

Being private frees up management’s time and effort to concentrate on running and growing a business with priority shifting from meeting quarterly earnings expectations to creating and building long-term shareholder wealth, as there are fewer regulations to comply with. Thus, the top management can focus more on improving the business’s competitive positioning in the marketplace.

Becoming and remaining private allows a more considerable degree of freedom for company management to embark on long-term, innovative, and higher risk ventures without the scrutiny of stock analysts, investors and the media, since the pressures of quarterly results do not bind a private company. Another reason for going private could be a buyout by a private company or a venture capitalist firm. By going private, the company’s shares will be delisted from the stock exchange and will no longer be traded in the exchange, so the company doesn’t have to deal with the volatility of the stock price. In return, the shareholders often get cash or stocks in a defined proportion.

Elon Musk had sent an email to Tesla employees and posted on its blog that the noise besieging Tesla is precisely why he wants to take its shares off the market, loosening up Tesla from some investor and media scrutiny in a year when it’s had some highly publicised struggles. “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,” he wrote. He also blamed the “quarterly earnings cycle,” which puts “enormous pressure on Tesla to make decisions that may be right for a given quarter, but not necessarily right for the long-term,” and a large number of short sellers “who have the incentive to attack the company.”

Also, as a private company undeterred by Wall Street’s 90-day attention span, it allowed Dell to boil down the priorities to just two metrics: cash flow and growth.

Basically, you need to understand that public companies raise capital to expand and private equity firms and venture capitalists use IPOs as an exit strategy to get out of the investment and let them earn returns. So, being private will free a lot of time and effort for the management and lets them focus on growing the business further.

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