Why Are So Many Companies Taken Private?

The takeover battle for Morrisons flags up the dilemmas faced by investors when their company is bought out

James Gard 3 August, 2021 | 11:47AM
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Taking listed firms private is all the rage this year. Supermarket Morrisons (MRW) is at the centre of a takeover battle between private equity firms, while the owners of Daily Mail publisher DMGT are looking to take the company private for the first time in 90 years. At Morningstar.co.uk, we have covered a range of IPOs in recent months, from Deliveroo to Coinbase and Robinhood, so it makes sense to look at why and when companies go in the opposite direction and leave the stock market through buyout, merger or acquisition.

The Pros of Companies Going Private

  • The most obvious benefit for shareholders is that buyers usually offer a price above the company’s existing share price. According to data from AJ Bell, the average premium paid in 2020 and 2021 for UK stocks is 37%, which is a decent return for existing shareholders.
  • Businesses often find it easier to restructure away from the demands of being a stock market listed company. Tough decisions on jobs or strategy don’t have to be put to millions of shareholders and the company doesn’t need to report results every quarter (or pay out dividends).
  • A struggling or failing company can be put up on the blocks and problems fixed –which usually involves an injection of cash – before being sold back to investors. As our explainer on private equity shows, firms that take companies off the market are looking for a return just like any investor.
  • Being taken private is often not a one-way street, so retail investors can often get the chance to own a company again, often as part of a new and bigger group.

The Cons of Going Private

  • As a retail investor you are missing out on the company’s future growth
  • … And buyouts mean fewer companies for investors to choose from, which means less choice for funds, pension schemes and indices. This also matters for income investors who rely on listed companies to pay dividends.
  • From an ESG point of view, being public also brings a level of accountability that can improve a company’s relationship with workers and the wider community (eg. Uber has had to upgrade drivers’ terms and conditions as a listed company)
  • It’s easy to get real-time information on what listed companies are worth and what you’d get if you sold them today. But valuing private companies is much harder because there isn’t enough information on sales, profits and how products are performing.

Let’s look at some examples of buyouts:

Morrisons share price

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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James Gard  is content editor for Morningstar.co.uk


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