What Happens to Stocks If a Company Goes Private?

IPOs are among the most talked-about and watched events in the investment world. New companies going public create new opportunities and can unlock stores of value that were previously inaccessible to most investors.

Much more rarely, though, companies will decide to remove themselves from public markets and go private. What happens to stocks when companies go private, and what kind of returns can investors expect to see when their shares no longer trade publicly?

What Does the Privatization Process Look Like?

There are a range of different ways for a company to go private. The most common is for the company to be acquired by another, larger business.

This process begins with an offer to buy out the company’s shares at a certain price point. In most cases, this will be followed by a shareholder vote in which a majority of shareholders must vote to approve the offer.

If the vote goes through, the acquiring company will pay the agreed-upon price for the target company’s shares on a specific date. After that point, the target company will cease to be publicly traded and become part of the acquiring company.

For concrete examples, let’s look at two recent instances of major businesses going private. The first is the case of Elon Musk’s acquisition of Twitter, now X.

Musk started that process by buying up 9% of the stock on his own. After unsuccessful negotiations that nearly put the billionaire entrepreneur on Twitter’s board, Musk offered to buy the company outright for $44 billion. The deal went through, leading Twitter shares to be delisted from the NYSE on November 8, 2022.

Another case involved the acquisition of STORE Capital, a REIT that became somewhat notable in the investment world as one of Warren Buffett’s rare forays into real estate investing.

In 2022, the trust was acquired by a combination of Oak Street Capital and GIC, the Singaporean sovereign wealth fund. The acquisition was completed for $32.25 per share, about 20% above the stock’s price prior to the offer being made.

This was a somewhat more traditional privatization than Twitter’s, as the buyers for STORE Capital were financial business entities instead of an extremely wealthy individual.

It’s also important to note that mergers and acquisitions may cause a company’s stock to stop trading without making it a fully private business. In many cases, one public company merges with or is acquired by another public company. This means that the business is still, to some degree, exposed to public stock markets.

An example of this can be found in the pending acquisition of Discover Financial Services by Capital One. Though Discover’s stock will cease to trade after the deal is complete, Capital One shares will still trade publicly and give investors exposure to the combination of the two companies.

A final note here is that some companies manage to go private without merging or being acquired. In a management buyout, for instance, the members of a company’s management team might offer to repurchase all or most of their own company’s stock, eventually removing it from public trading.

What Happens to Shareholders When a Company Goes Private?

No matter what path a company takes to go private, its shareholders must be compensated for their shares. As noted above, this is usually done through an offer to buy the shares at a specific price.

Since most acquisition offers require a shareholder vote, investors are also given the chance to turn the offer down if it isn’t good enough.

If the company making the acquisition is also publicly traded, investors may be compensated with stock in the acquiring company instead of a cash payout.

Needless to say, there are advantages and disadvantages to stock acquisition offers. On the plus side, shareholders who are given shares in the acquiring company may benefit from the synergy between the two companies and realize larger gains over time.

On the downside, stock offers dilute the shares in the acquiring company, a fact that can disadvantage existing shareholders.

Again, we can look at Capital One and Discover for an example of how all-stock acquisitions work. Discover investors are being offered 1.0192 shares of Capital One for each of their Discover shares. Discover’s shareholders, therefore, will become Capital One shareholders once the acquisition is complete.

What Kind of Premium Do Shareholders Get When a Company Goes Private?

More often than not, shareholders receive an acquisition premium when their shares in a company are bought up during a merger or acquisition. This is because there’s little to no incentive to approve the acquisition if it doesn’t result in a payout above the stock’s current market price.

Though premiums can vary depending on the nature of the deal and the macroeconomic climate at the time, the long-term average premium for acquisitions across all industries has been about 30%.

It’s interesting to note the effect of this premium when the acquiring company is publicly traded. Because the company is paying a premium for the target business, it almost necessarily must pay more than that business’s intrinsic value.

This cost, which appears on balance sheets as a goodwill charge, typically causes a slight drop off in the acquiring company’s share prices.

What Happens to Shares After a Company Goes Private?

Whether shareholders are given a payout or public shares in a new company as compensation, the end result for companies that will no longer trade publicly on their own is being delisted from stock exchanges.

Once a company has been taken private or rolled into another public company, the original company’s stock will cease to trade altogether.

Although this process may seem permanent, there are companies that have gone public again after being taken private. A prominent example was Panera Bread, which generated massive returns for longtime shareholders before going private in 2017.

Late in 2023, however, the company confidentially filed for an IPO in hopes of once again going public. Although a timeline for the IPO hasn’t been established yet, Panera serves as an excellent example of a large company that temporarily went private only to choose public trading again later on.

What Happens to Stocks If a Company Goes Private?

When stocks go private through acquisition, they are usually bought out at a premium to their current valuation, leading to a spike in value for shareholders.

Privatization has both its ups and downs for shareholders. On the plus side, shareholders receive a one-time premium on their shares that usually results in a fairly healthy return. Given the long-term average mentioned above, the premium that is attached to acquisitions averages almost three times the typical annual return of the S&P 500.

Some investors even choose to specialize in stocks they think are likely acquisition targets to realize these outsized gains.

Though buying a stock with insider knowledge that it will soon be acquired is strictly illegal, there are some indicators that may help investors find likely targets.

These include sudden spikes in trading volumes or unusually low valuations that may make companies appealing investments even with an acquisition premium built in.

The negative, though, is that shareholders miss out on the future growth that the company going private might have produced. After they receive their payments, shareholders who are offered cash in exchange for the privatization of their shares can’t realize future capital gains or dividends on the shares they owned.

Those who receive stock in another public company can keep realizing gains, but the stock they receive is often somewhat diluted and doesn’t give them direct exposure to the original target business.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.