Market Overview

The Grass Is Always Greener: Why Companies Switch From Private To Public And Vice Versa

The Grass Is Always Greener: Why Companies Switch From Private To Public And Vice Versa

A private company’s initial public offering (IPO) is often considered a right of passage for a growing business and is celebrated on Wall Street like a wedding or birthday. So why is it that a handful of public companies eventually leave public life to go private once again?

A public company has shares of stock that trade on a public exchange like the NYSE or the NASDAQ. If a retail investor wants to invest in a public company, all he or she has to do is log into a trading account and buy shares at their quoted price.

Public companies are typically considered to be more prestigious than their private counterparts. However, from a business perspective, going public also makes it easier for companies to raise money by issuing shares of stock, and it reduces a company’s overall cost of capital. For example, public companies tend to have more leverage when it comes to negotiating loan interest rates with banks.

Why Doesn’t Every Company Go Public?

There are also several disadvantages to trading on a public exchange. First, it’s expensive. Annual fees for the NYSE and NASDAQ range from $27.500 to $500,000, but the expenses don’t stop there. Every public company is responsible for a slew of regulatory filings, including an annual report and quarterly earnings reports. These filings require auditors, lawyers and other regulatory professionals, none of which work for free.

Related Link: Terms Of The Trade: Exchange-Traded Funds And Exchange-Traded Notes

Finally, when a company goes public, management literally turns over control of the company to shareholders. That means that big decisions are made via shareholder vote, and the best interest of the shareholders always takes top priority.

On rare occasions, certain public companies decide they’ve had enough of public life and make the transition back to the private sector. Executives may decide they want to take back control of the company or they are tired of wasting time and money jumping through regulatory hoops. Sometimes, a private buyer will step in and take a public company private if the buyer believes the public market is not fully valuing the business. This scenario often happens when a business is still profitable but is seen to be in secular decline.

Recent Examples

Earlier this year, Apollo Global Management LLC (NYSE: APO) decided to take Outerwall Inc (NASDAQ: OUTR) private for this very reason. Outerwall’s PE ratio is currently 6.7.

Dell computers was taken private in 2013 for similar reasons. Prior to its transition, the stock’s PE ratio was below 9.0.

Apollo Global has also taken several other public companies private in 2016, including ADT Corp, The Fresh Market, Apollo Education Group Inc (NASDAQ: APOL) and Diamond Resorts International Inc (NYSE: DRII).

There are pros and cons to life on the public exchange. But for this handful of companies, the grass seemed greener back on the other side of the fence.


Related Articles (APO + OUTR)

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