We sometimes hear of a company being talked about in the press and several wealthy people are “considering taking it or going private ” but what does this mean? Going private is a series of transactions in which the publicly traded company (note its stocks are trading in the open market), are taken and placed into a private entity. Once it goes private, those who do own stocks are no longer able to trade their stocks in the open market. A company that is listed on the stock exchange has its shares traded by the public. Once it goes private, the stocks are held by owners who trade off market in private transactions.
We heard earlier this year a comment by the owner of Tesla suggesting that he would work with investors in Saudi Arabia to take his firm private. This did not take place and the press was walking it back, as was the owner of Tesla. These comments are not taken lightly as it means the flow of billions of dollars of stock and massive profits or losses.
A company can initiate a management buy out or a MBO. This is when management pools resources and works closely with banks to buy the company and thus taking it private. A leveraged buy out of LBO would be described as what is usually a private equity firm, working with structures and using the firm assets of the firm in the transaction. They of course take it private. In this case a significant amount of borrowed money is involved. Assets of the company are usually used as collateral for the loans. LBOs are easy on some cases as it can take less capital committed.
These companies taken private are sometimes struggling firms in which the private equity firm buys it and rebuilds it. This happens often and is a very profitable business as the company taking the troubled firm private reaps massive equity returns when they buy it out and then sell it. Keep in mind that although these firms are shown as pirates by the main stream media, they often turn troubled companies around putting them back on the path of profitability.