p. What is meant by “going private”? What are some advantages and disadvantages? What role do private equity funds play?
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Randy’s, a family-owned restaurant chain operating in Alabama, has grown to the point that expansion throughout the entire Southeast is feasible. The proposed expansion would require the firm to raise about $18.3 million in new capital. Because Randy’s currently has a debt ratio of 50% and because family members already have all their personal wealth invested in the company, the family would like to sell common stock to the public to raise the $18.3 million. However, the family wants to retain voting control. You have been asked to brief family members on the issues involved by answering the following questions: |
Explanation
Going private refers to the practice of converting a publicly trading company into a private company. A company might go private in following cases:
It is acquired by another private company
It is taken over by a hostile bidder, its own management or few private individuals
If shareholders are not benefitting from public trading of the company, they might decide to go private.
Going private will delist the securities of the company from trading platforms and thus, shareholders will not be able to trade the securities in an open market.
Advantages of going private are:
Economical: Going private will delist the securities of a company from trading platforms; thus, saves the time and cost required to serve the general public, filing annual returns, registration of securities, requirements of securities and exchange commission.
Increased managerial efficiency: Going private dilutes the stake of outside investors; thereby, maximising the stake of the inside managers. Managers have to work hard for their own benefits to earn maximum incentives and perquisites through increased income, in turn hard work also makes the managers efficient.
Increased managerial flexibility: Managers in a private firm do not require to worry about the market trading of company's securities, rising and falling price of securities. Instead they can invest their valuable time and efforts in strategies, goals and wealth of the company.
Active and worthy participation of shareholders: With elimination of large public shareholders from the firm while going private, few investors left with the firm can actively participate in the decision making process and other ownership activities of the firm. This in turn avoids delay or conflicts in decisions and also adds value to the firm and shareholders.
Disadvantages of going private:
Private companies restrict its shareholders to transfer the securities whenever need arises.
Private companies cannot have more than fifty shareholders.
Public companies have easy and favourable access to large amounts of equity capital as compared to private companies.
Going private may cut down a company's equity share capital and increase the risk through inclusion of debt in the capital structure.
Shareholders often found it easy and worthy to invest in public companies because of their sound image in the capital market.
Private equity funds are majorly created for the purpose of purchasing or managing investments of public trading companies and make it a private entity.
Private equity funds can also be used to make investments in private companies in order to improve the company's performance, accelerate its growth rate or acquire the firm. The funds are managed by either a firm or a limited liability partnership.
Verified Answer
Going private is the practice of converting a public trading company into a private entity through repurchasing its stock issued to the general public and delisting securities from the trading platforms.
Advantages of going private:
Going private reduces the cost and formalities of filing periodic returns with securities and exchange commission.
Going private enhances the flexibility and efficiency of management.
Going private evolves active and worthy participation of shareholders in the proceedings of the company.
Disadvantages of going private:
Private companies restrict trading of securities.
Private companies can have a limited number of shareholders.
Private companies have least access to equity capital as compared to the public companies.
Shareholders are usually interested in making investments in public companies.
Going private makes the securities of the company illiquid.
Private equity funds are created for the purpose of holding stakes in a public trading company and make it private through raising funds from financial institutions or wealthy investors.
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