Why do public firms go private?

By: Tim Bennett

Why do company directors sometimes choose to take listed firms back into private hands? Tim Bennett investigates.

To Receive Tim’s videos straight to your inbox, please click here.

Why do public firms choose to go private?

Most ambitious company CEOs dream of growing a firm and taking it onto public markets via an Initial Public Offering (IPO). So, why would an existing listed company choose to go the other way?

Who does it?

Over recent years there have been plenty of examples of firms going back into private hands, having been formerly public. Here are three of the biggest.

Why they do it

Sir Richard Branson, whose Virgin Media group has been both a private and public company, sums it up like this;
There are several reasons why life as a public company can lose its allure for entrepreneurs. First, there is the level of public and press scrutiny that comes with the title. Directors are also under constant pressure from analysts to explain performance and deliver earnings targets. Lastly, the additional time and costs associated with complying with the rules that come with being a public company can become oppressive in the eyes of some CEOs.
Perhaps most important of all is the fact that there are now many private sources of capital available to firms, outside of the public arena.

Who funds a public to private switch?

Over the last decade or so an army of private capital providers has sprung up, willing to back firms away from the public spotlight. Here are three of the bigger examples;

Why would a CEO prefer to use one of these?

There is a perception amongst CEOs that public markets can be very short-termist and even an accompanying gripe that they do not always understand a business as well as they should, Whether, or not, this is fair, there is certainly quite a lot of private expertise in running companies available away of the glare that comes with being publicly-owned.
Take Dell – it went private a few years ago and would claim to have developed faster as a result.

The grass isn’t always greener…

Despite the enthusiasm for private markets shown by some CEOs, the truth is there is no free lunch in investing. Whilst private capital may be willing, and able, to take a longer-term view, firms still must generate sufficient returns to satisfy their new backers. Some of the downsides of this route may be summed up as;

The bottom lin

In the end firms need to weigh up carefully which type of market will best suit their needs. Some are simply too big to be held in private hands – the profile they enjoy once listed can actually improve the terms on which they raise capital. Then there is the incentives issue – public companies can offer ambitious CEOs pay structures with greater upsides and a visible way to reward loyal staff. Meanwhile, although scrutiny from the analyst community can be an irritant for a public firm, so too can the demands of private equity buyers and owners.
To discuss this theme further, please speak to an Investment Manager.
How do you weigh up older defined benefit schemes against newer defined contribution arrangements? Tim takes a look in his updated video.