Public to private transactions occur when a publicly listed firm is purposely delisted by a controlling owner. This is also known as ‘going dark’ and usually happens when the company has been bought over by a private equity fund.
Why do companies go dark?
There are many reasons why a public to private transaction makes sense for a controlling shareholder. Companies list on a stock exchange to raise new financing and aid expansion, but public listing can also bring some difficult challenges.
Share price volatility, undervaluation, greater transparency, stronger reporting requirements and the scrutiny of a regulator all come with a public listing. If there are no ongoing discernible benefits from being on a stock exchange, it can make sense to delist and run the company away from the constant glare of analysts and investors.
Are Public to Private Transactions Common and Important?
A research paper by Preqin shows that public to private transactions only make up a very small percentage of private equity buyouts and that their frequency has varied over time.
However, if you look at public to private transactions from the perspective of their value, they are significantly more important. According to Preqin, they made up 49 per cent of the value of all private equity buyouts in the peak year of 2007, with value fluctuating up and down since then.
What Happens to Minority Shareholders when Firms go Dark?
A major concern of public to private transactions is that minority shareholders lose most of their rights when their firm is no longer listed. It is much more difficult to sell shares or to get information on the company’s finances or performance when there is no necessity for transparent reporting.
Along with my co-authors, Emanuele Bajo, Massimo Barbi, and Marco Bigelli, I examined the role of financial institutions in protecting minority shareholders in Italian firms when the controlling owner wants to take a firm private.
We found that institutional investors play a central role in the bid process and can protect minority shareholders from being frozen out in the bid. Specifically, tender offers in a public to private transaction are less likely to succeed when a firm has institutional investors in its ownership structure.
Furthermore, when public to private offers are accepted, bid premiums are significantly greater if a financial institution (particularly when it is foreign, independent or activist) has a stake in the firm.
Finally, threats to merge the target if the bid fails and external validation of the offer price have no impact on either the likelihood of delisting or the premium paid by the bidder.
If you are interested in reading more about public to private transactions and how institutions protect minority shareholders, the published paper can be found here:
Bajo, E., Barbi, M., Bigelli, M., & Hillier, D. (2013). The role of institutional investors in public-to-private transactions. Journal of Banking & Finance, 37(11), 4327-4336.