Why do some companies decide to leave the stock market?

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Apple's stock rose 1.06%. Amazon had a good day, with its shares gaining 2.31%. Ford had a rough day, with its shares dropping 3.2% today. You’re used to reading these kinds of sentences in the newspapers or in Vivid Editorial. They refer to publicly traded companies, whose shares fluctuate, in part, according to the confidence that investors give them. But while the goal of many companies is to eventually go public, some decide to do the opposite and leave the markets. So what are the reasons why a company would decide to go private and what does this mean for its shareholders?

How to go private

Let's say you're the CEO and major shareholder of a publicly traded company and you decide to get out of the markets. How would you proceed?

In very simple terms, you just need to buy every single share of the company. 

Typically, in a "takeover" transaction a large private equity group, or a consortium of private equity firms, will buy these shares of a publicly traded company. It’s also possible that the person who decides to take a company off the stock exchange is its main shareholder.

Due to the large size of most listed companies, with valuations ranging from several hundred million to several billion dollars, it is usually not possible for a company or an individual to finance the purchase on their own.

The buyer generally needs to obtain financing from an investment bank or lender capable of making sufficient loans to help finance (and close) the transaction.

And that's it! It's as simple as that. Is it though? Yes and no.

What does this mean for shareholders?

Not all shares of a company are just floating around on the stock market. Some belong to investors who are holding on to them long-term. In order to exit the financial markets, the buyer of the company has to convince the shareholders of the company to sell their shares. But how do you do that? Simply with the most common language spoken by investors: money.

Imagine that someone absolutely wants to buy the apartment you own. You feel comfortable there and had never thought of leaving it. To convince you, they'll make you an offer you can't refuse. No, not one that involves blood and tears. Instead, they will probably offer you more money for your apartment than its current market value.

It’s the same thing when you want to take a company off the stock market. The person or group of people who wants to take the company private must buy the shares from all shareholders in order to own them all . In this case, the potential buyer will make an offer per share at a price higher than the shares. This is called a premium. Lately, the amount of these premiums boomed as it reached an average of 45% above the previous share price for European companies and 42% for U.S. companies since the beginning of the year. Great deal, isn't it? This explains why the share price of a company increases when such an offer is made.

But why go private?

Why would some companies decide to leave the stock market? While an IPO is mainly motivated by the desire to increase the company's capital in order to help it grow, there are many reasons why a company may decide to go private, and they may differ from one situation to another.

Being a public company comes with constraints: you have to publish quarterly results, be compliant with the rules of the trading platform, you’re vulnerable to market jolts and pressure from shareholders on the company's strategy, etc.

The costs associated with an IPO and the brokerage fees can also discourage the administrators of a company. Naturally, being listed on Euronext or the New York Stock Exchange costs money.

Another reason for a company to go private is to take back control of its operations and escape the pressure of shareholders, who are generally more interested in short-term results, which bring dividends, than in the long-term evolution of a company.

This is why the French telecom operator, Iliad, decided to leave the stock market last July. This was done at the initiative of its founder and main shareholder, the businessman Xavier Niel, who bought all the shares of the company.

The purpose of the operation was to remove his group from the pressure of the markets, which he believed undervalued it, but also to be able to make long-term investments. In announcing the takeover bid, Xavier Niel stressed that "Iliad's new development phase requires rapid transformations and significant investments that will be easier to carry out as an unlisted company."

The "significant investments" announced by Xavier Niel could mean a significant drop in profits for a few years. This could be a bad signal for shareholders, with a consequent risk of a drop of the company's share price, even if it makes investments that it considers to be profitable in the long term.

When a company's share price falls, it is easier for one of its competitors to make a takeover bid. In the case of Iliad, a withdrawal could also be a way for the company to protect itself to avoid this scenario.

What are the limits to going private?

To escape from the pressure of the financial markets, to regain control of operations, to free oneself from the administrative constraints linked to being listed: these are all reasons that can push a company to go private. But is it really worth it? What are the risks for a business that decides not to be publicly listed anymore?

As mentioned above, going private means buying back the company's shares from its shareholders. This comes at a considerable cost and is generally financed by debt. Usually, a company that goes private will have a large amount of debt to pay back to its creditors.

Another potential pitfall is the difficulty that unlisted companies may have in raising funds to finance their growth. It is easier to increase capital by issuing new shares than to go fishing for large investors, the only ones able to bring in enough money to help finance a large company.

But, an exit from the stock market can also be temporary. The most classic example of going private before returning to the markets is computer giant Dell. In February 2013, Michael Dell, boss of the tech company, decided to exit the market. The company's stock was then worth only 13 dollars after hovering around 50 dollars at the beginning of the 2000s.

However, Dell didn't stay away from the market for very long: it went public again in 2018 by buying an already listed company, VMware, which allowed it to avoid the sometimes heavy process of a traditional IPO. Today a share of Dell is worth more than 100 dollars.

So is leaving the stock market a good idea? While it's hard to answer yes or no, one thing is certain. If you're a shareholder in a company that decides to take that step, you could be in for a good deal.

Any opinions, news, research, analyses, or other information contained on this website are provided as general market commentary, and do not constitute investment advice, recommendations nor should be perceived as (independent) investment research. The author or authors are employed by Vivid and may be privately invested in one or several securities mentioned in an article. Vivid Invest GmbH offers as a tied agent of CM-Equity AG the brokerage of transactions on the purchase and sale of financial instruments with the exception of those in the area of foreign exchange brokered by Vivid Money GmbH.