The Process and Motive Behind Companies Turning from Public to Private Elon Musk’s Telsa privatization tweet is the right opportunity for traders to refresh themselves about the process of public to private.
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When you’re deep into stock trading and investing, you realize that companies change ownership or their management structure to suit their long term requirements. The Opposite of IPOs We hear of initial public offerings (IPOs) from time to time, when companies go to the markets to float shares for the first time. They go from being a private company to a public one. But Elon Musk’s recent tweet about his intention to take his Tesla ($TSLA) electric car company from a public company – which it currently is, with its stock represented on the stock market – to a private company has probably reminded investors, traders and the public of the possibility of the opposite of an IPO happening. The tweet, which was posted on the 7th of August, 2018 sent shares initially spiking by over 10%. Now when a company transforms from a public to a private company, investors get to purchase most outstanding shares in the company and then delist it from the stock market. Privatization usually happens when the company gets undervalued significantly in the market, making it realize that there is no point in continuing as a public company with decreasing value. The Process of Public to Private It doesn’t take much, in terms of processes, for a public company to become private. It is easier than for a private company to become public. The process basically involves a private group of investors offering to buy the shares of the company from its shareholders. The group will also mention the price it can pay for the shares. For the sale to take place, the majority of the voting shareholders must vote to accept what the private investor group has put forward. Once the company shares are sold to the bidder, the company becomes a private company. When the Public Company Takes the Initiative to Go Private There are times when it’s the public company’s leadership that takes the initiative to propose the privatization of their company. And that’s what we saw with Tesla. Founder and CEO Elon Musk tweeted his intention of taking Tesla private at a price of $420 per share. That is significantly higher than the price at which the stock was trading at the time. The tweet sent shares in the company spiking by over 10%. As a result of the excitement generated by the tweet, the trading needed to be paused.
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Musk’s Reasons Musk’s reasons were to avoid the spotlight and intense scrutiny endured by a public company. Musk felt it suffocated Tesla from carrying out its true objectives. Having to please investors and market analysts, the company was being withheld from working towards its long term goals and some adventurous pursuits. Being a public company, Tesla witnessed its stock price going through “wild swings”, Musk said in a letter to his employees. These swings distracted the company from its goals. Moreover, Musk also felt the intense pressure of the quarterly earnings reporting that, he said, caused his company to focus on decisions that would appear right for the respective quarter but not necessarily for the longer term. Tweet Could Cause Trouble The share price hike is an indication that publicizing this decision did a lot of good for the company shares. But that was in the short term. The next day, investors started doubting how viable Tesla’s plans actually are. And it was also reported that the SEC could hold Musk guilty of market manipulation by tweeting something that perhaps might not happen. If evidence of any internal communication between the company’s directors and Musk exists that points to a desire for privatization, then Musk won’t be held guilty. So let’s see if the company actually goes ahead with the process.
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