Stocks list on markets all the time through the process of an IPO or initial public offering. But, stocks also go private all of the time albeit to much less fanfare. Many questions may arise when a stock you own suddenly decides to go private. This article will ensure your in a beneficial outcome when the stock is delisted.
Public stocks go private when a majority owner holds a vote to take the company off the exchange. Over 50% of outstanding shares must vote to take the company private at a specified price. If you decide not to sell your shares liquidity may make it difficult to sell profitably in the future.
Companies decide to go private for a variety of reasons. Typically it happens when stocks have been performing poorly. For this reason retail growth investors get caught in a less than ideal situation as the price paid is less than the purchase price.
Real World Examples of Stocks Going Private
Elon Musk deciding to buyout Twitter and take it private has caused a lot of commotion in the finance space. Many are wondering if it will even happen. Thus the stock price trades below the offer price.
This is a less than ideal situation for Twitter investors who bought far above the current offer price. This is where growth investors need to be cautious and not buy to far above fair valuations.
In my many years of investing in cheap value stocks that trade below book value, I have had the opportunity to realize one of the desired outcomes of this style of investing.
Purchasing below book value leads many investors to realize the difference between their own purchase price and offer price to take a company private. Obviously most investors won’t accept a bid that is far below the value off the assets.
This happened with a few of the companies I’ve owned and have worked out in my favor.
Verso was the first company I ever did an analysis on. It’s a paper company that processes raw materials such as wood into various paper products. While the company had it’s ups and downs it eventually was taken private by outside investors.
The stock distributed a lot of cash to shareholders and had difficulty consistently being profitable. It was a long drawn out way to profit, but it eventually paid off in the end.
With Verso I decided to sell in the open market at a price slightly below the offer price, because of all the drama. I had already made a significant portion from the price rise and dividends so decided the time value of money would be better served elsewhere.
Sin Ghee Huat
A hotel carpet company known as Sin Ghee Huat was my second experience with a stock going private.
In the example of Sin Ghee Huat I wanted to experience first hand what happened when a company goes private. A vote was held and before I knew it trading was halted, worrying officially began.
It took a lot longer than I anticipated, but my brokerage Interactive Brokers sent me a message asking if I would like to tender my shares. After answering yes, nearly a month passed by and I finally received cash for my shares.
Of course in this situation I decided to sell my shares as it would be very difficult to offload them privately. Especially since the company was located in Singapore and purchased by a Chinese company.
Sadly, I never owned this corporation. AVX was just a stock I wrote about on Seeking Alpha as a potentially good investment. I guess I should have taken my own advice.
AVX was an American company that was publicly listed. However, it was majority owned by Kyocera, a Japanese company. Kyocera decided to buyout the rest of the shares at a price above what it currently traded at and took the stock private. All investors were required to tender their shares.
Well in this case technically the stock was taken private and made a wholly owned subsidiary, but you could still own the company through purchasing publicly traded Kyocera.
Reasons Behind a Stock Going Private
There are a multitude of reasons behind a stock going private. Most of them are because of a struggling share price. This is why deep value investors believe this as nearly always a positive outcome.
Some of the reasons behind a stock going private I explained in a few of my real world examples above. But, here are all the reasons I can currently think of:
- Company will save money not having to report earnings and reporting to shareholders.
- Far easier to restructure a private company.
- Investor decides he can buy a company cheap enough and reap all the rewards himself.
- Subsidiaries become wholly owned instead of partially owned.
- International regulations require stocks to delist.
- Share price is consistently below 1 dollar requiring delisting.
Most of the reasons above are positive for value investors aside from low share prices and international regulations. These issues create problems with liquidity. It becomes far more difficult to sell your shares resulting in lower prices.
This is where some unscrupulous individuals will take shares private. They know that your options for selling at a decent price has evaporated so they may offer prices far lower than would otherwise be accepted.
This is why it’s generally best to stay away from unprofitable companies trading at lower share prices, unless they have desirable assets.
What Happens To Your Shares If a Stock Goes Private
When a company decides to take a stock private you have a few options:
- Tender your shares at the price offered.
- Hold onto your shares in the newly private company.
In nearly every case the first option is usually best for retail investors. It may also be that you are forced to sell your shares. However, if you really believe in the company long term and are not forced to sell your shares you may choose to hold onto your shares.
In doing so you will accept the risk of liquidity. It will take longer and be more difficult to sell your shares. But, this may be changing thanks to websites like Equityzen.
Equityzen is usually used to help employees offload shares pre-IPO. But, might also be a possibility for individuals who have shares in a newly private company.
How to Benefit Most From Stocks Going Private
Both growth stocks and value stock investors can benefit from a stock going private. The key is to buy shares in companies that are not overvalued.
Growth investors will see the most benefit buying shares below price to earnings growth or PEG. This typically happens when a larger competitor decides to buyout its smaller competition.
While a company does not always need to be profitable for this to happen, this ensures your shares are not bought out during a downturn when prices are unfavorable.