A Going Private Transaction is the process where a company whose shares are traded publicly on a stock exchange is purchased by a private group, removing it from the public market. The buyers could be the company's own management (in a move called a Management Buyout (MBO)), a private equity firm, or another private entity. To do this, the acquirer must buy all of the company's outstanding shares from the public shareholders. Once the deal is complete, the company is no longer required to file reports with regulatory bodies like the SEC and its shares cease to trade on exchanges like the NYSE or NASDAQ. These deals are often financed with a large amount of debt, in which case they are famously known as a Leveraged Buyout (LBO). For the public shareholder, a going private transaction means your investment journey with that company is about to come to a forced, and hopefully profitable, end.
Why would a company want to ditch the prestige and easy access to capital that comes with a public listing? The reasons often boil down to freedom and focus.
Public companies live in a fishbowl. They are under constant pressure from shareholders and analysts to meet quarterly earnings expectations. This relentless short-term focus can force management to make decisions that boost the next quarter's results at the expense of long-term health and innovation. By going private, the company's leaders can step off this treadmill. They can implement long-term strategies, invest in ambitious R&D projects, or undertake a major restructuring without worrying about a temporary dip in profits spooking the market.
Being a public company is expensive. There are significant costs associated with stock exchange listing fees, shareholder communications, and complying with regulations like the Sarbanes-Oxley Act. Taking the company private eliminates these administrative and regulatory burdens, freeing up cash and management's time to be spent on running the actual business.
If you own shares in a company that announces it's going private, you're no longer in it for the long haul. Your role suddenly shifts from a long-term owner to a seller.
Typically, you will receive a cash offer to purchase your shares. To make the deal attractive and get shareholder approval, this offer is almost always at a premium to the stock's recent trading price. For example, if the stock was trading at $40 per share, the buyout offer might be $52 per share, a 30% premium. This premium is your immediate reward for giving up your stake in the business.
Your decision isn't whether to sell—in most cases, you'll be forced to sell if the deal is approved by the majority (a process called a “squeeze-out”). Your real job is to decide if the price is fair. A value investor shouldn't just gratefully accept the premium; you should have an idea of the company's intrinsic value.
A going private announcement can be a bittersweet moment for a value investor. On one hand, it's a powerful validation of your analysis. If you bought a stock because you believed it was undervalued, a buyout offer—especially from insiders—is strong evidence you were right. The deal acts as a catalyst, forcing the market to recognize a portion of the value you identified and handing you a tidy profit. As Warren Buffett has noted, watching what knowledgeable insiders do is a great clue. A going private transaction is the ultimate insider bet. On the other hand, it means your journey with a potentially wonderful business is over. The private equity firm or management team who takes it private gets to enjoy all the future growth and compounding that you, the public shareholder, will now miss out on. You get a nice one-time profit, but they get to keep the golden goose. It’s a classic case of a bird in the hand being worth two in the bush, but for a value investor, those two birds in the bush were often the whole point of the investment.