When a company’s shares trade on a public stock exchange, its moves are subject to intense scrutiny. The decision to “go private” involves delisting from the exchange and buying back all shares from the public. This transforms the company into a privately held entity, where ownership is concentrated in the hands of a small group, such as its founders, management, or a private equity firm. This move is a calculated strategic maneuver that fundamentally alters a company’s obligations, ownership structure, and operational playbook.
The Primary Motivations for Going Private
A primary driver for going private is the pressure to meet quarterly earnings expectations. Public companies live in a three-month cycle, where any failure to meet Wall Street’s profit forecasts can lead to a drop in stock price. This short-term focus can force management to prioritize immediate gains over long-term health, such as cutting back on research and development. By removing the company from the public market, executives are free to make decisions and investments that may take years to pay off without facing punishment from investors.
Another motivation arises when a company’s leadership believes the public market undervalues its true worth. This can occur if the market is pessimistic about the company’s industry, overlooks valuable assets, or fails to appreciate a new strategic direction. Taking the company private is seen as a way to realize its intrinsic value away from the public eye. An outside investor, like a private equity firm, might also see this undervaluation as an opportunity to acquire the company at a discount, improve its operations, and sell it later for a profit.
Going private also offers a shield against shareholder activism. Activist investors purchase large stakes in public companies to influence management decisions, often pushing for actions that deliver quick returns, such as selling off divisions or funding share buybacks. These campaigns can be disruptive, costly, and steer the company away from its long-term strategic goals. By consolidating ownership, the company insulates itself from these outside pressures and can maintain a consistent, long-term vision.
Gaining Operational Flexibility and Reducing Costs
One of the benefits of leaving the public market is a reduction in regulatory and compliance costs. Public companies must adhere to rules like the Sarbanes-Oxley Act (SOX), which was enacted to improve financial reporting and corporate governance. Complying with SOX involves extensive internal controls, audits, and certifications that can cost large companies over $2 million annually. Once private, a company is freed from these expensive and time-consuming obligations.
Beyond cost savings, privacy becomes an operational advantage. Public companies are required to disclose a vast amount of information, including detailed financial results, executive compensation, and strategic plans. This transparency allows competitors to gain insights into their operations. Private companies can operate with a much higher degree of confidentiality, shielding sensitive data from rivals and the public.
Decision-making also becomes faster and more streamlined in a private setting. In a public company, major strategic shifts often require extensive communication with a broad shareholder base, and sometimes a formal vote. With ownership concentrated among a small, aligned group, private companies can make decisions more rapidly. This agility allows management to pivot in response to market changes or restructure the business without the lengthy process of gaining shareholder consensus.
The Process of Taking a Company Private
The process of going private begins when an entity—such as a private equity firm, the company’s own management team, or another corporation—decides to purchase all of a company’s publicly traded shares. The goal is to consolidate ownership, delist the stock from the exchange, and take full control of the company’s operations.
This acquisition is frequently structured as a Leveraged Buyout (LBO). An LBO involves using a significant amount of borrowed money to finance the purchase of the company. The assets and cash flows of the acquired company itself are used as collateral for these loans. This high-debt financing model allows the acquirer to make a large purchase with a relatively small amount of their own capital.
A specific type of LBO is the Management Buyout (MBO), where the company’s existing executives lead the acquisition. In an MBO, the management team partners with a financial backer like a private equity firm to secure the necessary funding. The mechanism for acquiring the shares from the public is often a tender offer. This involves the buyer making a formal, public offer to all shareholders to purchase their stock at a specified premium over the current market price.
Potential Downsides and Risks
A drawback of going private is the loss of access to public capital markets. Public companies can raise funds for expansion, acquisitions, or research by issuing new shares of stock. This option disappears for private entities, which must rely on bank loans, private lenders, or their own cash flow for financing. This can make it more difficult to fund growth initiatives or navigate unexpected financial challenges.
Because many take-private deals are financed as LBOs, the newly private company often begins with a heavy debt load. The cash flow that might have been used for innovation or expansion must be diverted to making interest and principal payments on the acquisition debt. This can constrain the company’s financial flexibility and increases its risk profile. If the business underperforms, it could struggle to meet its debt obligations.
Owners and employees also face reduced liquidity for their holdings. In a public company, shareholders can easily sell their stock on an exchange to convert their investment into cash. In a private company, shares are illiquid and cannot be sold as easily because there is no public market for them. This can make it difficult for investors and employees with stock options to realize the value of their ownership stake.
Notable Examples of Companies Going Private
In 2013, Dell Inc. completed a $24.9 billion buyout led by its founder, Michael Dell, and the private equity firm Silver Lake Partners. The primary motivation was to transform the company’s business model from a PC maker to a broader enterprise solutions provider. This was a long-term strategy that would have been difficult to execute while facing pressure for short-term results from public shareholders.
The acquisition of Hilton Hotels by the private equity firm Blackstone in 2007 for $26 billion is another example. Blackstone saw an opportunity to acquire a brand whose assets it believed were undervalued by the market. The goal was to invest heavily in the properties, shift to a more efficient business model, and improve operations before eventually taking the company public again, which it did successfully.
The 2022 acquisition of Twitter (now X) by Elon Musk for $44 billion is a more recent case. Musk’s stated motivations were ideological and strategic, including a desire to promote free speech by relaxing content moderation and to combat the platform’s issues with spam bots. Taking the company private was presented as the way to implement these changes without the business and public relations pressures inherent in a publicly traded company.