What Does it Mean When a Company Goes Private?

On Monday April 25, 2022, Twitter Inc. (TWTR) announced that it accepted an offer from Tesla founder and chief executive officer Elon Musk to be taken private for approximately $44 billion. The deal has a purchase price per share of $54.20, roughly a 38% premium over the company’s closing share price on April 1, 2022.

If approved by Twitter shareholders, it would reportedly be the largest deal to take a company private in at least two decades.

So what does it all mean? 

What happens when a company goes private?

Going private is the opposite of when a company goes public, or has an initial public offering. That’s when a private company lists on a public exchange, such as the New York Stock Exchange. Twitter, for example, went public on the Nasdaq in 2013.

Companies generally go private when another company makes a bid for the company’s shares. Executives of the company might also make a decision to take the company private, and buy the outstanding stock from shareholders.

When a company goes private, its shares are delisted from an exchange, which means the public can no longer buy and sell the stock. The company may offer existing investors a price for their shares that may be above the current level.

In recent weeks,  Musk purchased a 9.2% stake in Twitter, with 73.4 million shares worth $2.89 billion, making him one of the company’s largest shareholders. Musk initially said he would join Twitter’s board, but backed out. 

Some analysts considered Musk’s offer an attempted hostile takeover.  In response, company management deployed a “poison pill.” Poison pill is a phrase used to describe a limited duration shareholder rights plan effectively lowering the value of the shares held by the person trying to take over a company. 

Why would Twitter go private?

Private companies don’t have the same level of scrutiny that public companies do.

When companies are public, they must file quarterly earnings reports with the Securities and Exchange Commission (SEC). These reports are filled with details about the company’s profit (or lack of it), revenue, debts, and changes to management, among many other details.

Private companies are not required to file these reports.

By going private, a company can often avoid regulatory scrutiny and the need to make public filings about its hits and misses. And that may be at least one motivation for Musk to take the company private

Musk, who has approximately 80 million Twitter followers, has a complicated history with the social platform. In 2018 his tweets figured prominently in a complaint brought by the Securities and Exchange Commission (SEC), which ruled Musk made fraudulent claims about taking Tesla private.

In a statement from Twitter announcing the sale on Monday, Musk wrote:

“Free speech is the bedrock of a functioning democracy, and Twitter is the digital town square where matters vital to the future of humanity are debated,” said Mr. Musk. “I also want to make Twitter better than ever by enhancing the product with new features, making the algorithms open source to increase trust, defeating the spam bots, and authenticating all humans. Twitter has tremendous potential – I look forward to working with the company and the community of users to unlock it.”

Additionally, by taking the company private, Musk could make changes to the platform with less oversight from investors, regulators, and others.  He could, for example, avoid the Senate hearings in 2021 when chief executives from Facebook, Google and Twitter all stood publicly answering questions about how their platforms handle the spread of misinformation and extremism. 

Going forward Twitter may feel less pressure to provide the public and politicians with answers as to how it conducts its business.

Have other companies gone private?

Yes, recent examples include computer maker Dell, ketchup manufacturer H.J. Heinz, and the supermarket chain Safeway. Musk proposed taking his electric vehicle company Tesla private in 2018.

Good to know

It’s important to realize that many management teams that intend to take their companies private often don’t. British drugstore chain Walgreens Alliance Boots, for example, failed to reach an agreement with private equity investors for a multi-billion buyout deal in 2019.