Public to Private

Public to private (P2P, or going private) is a transaction in which publicly owned stock in a firm is purchased by a private group, usually consisting of private equity houses or the existing management (management buyout [MBO]).

The organizing sponsor group normally buys all the outstanding shares of the company. As a result, the firm’s stock is taken off the market (an exchangetraded stock is delisted). After the purchase, the firm’s capital structure has frequently substantial debt.

P2P transactions are often leveraged buyouts (LBOs). the selling stockholders are regularly paid a premium above the market price (De Angelo et al., 1984). thus, the acquirers aim to increase the company’s value by more than the premium paid.

Furthermore, the P2P usually turns the previous managers into owners, thereby increasing their incentive to work hard. the management strives to increase profits and cashflows by cutting operating costs and optimizing strategies and processes. There are many different sources of gains generated by P2P, which are similar to the gains sources from buyout transactions.

These include tax benefits, management incentives, wealth transfer to shareholders from other stakeholders or employees, asymmetrical information, and underpricing. A further major source of stockholder gains in P2P transactions is the mitigation of agency problems associated with free cashflow (Jensen, 1986).

Public to Private
Public to Private