3 Reasons Why A Company Would Be Privatised

Singapore’s stock market has seen a long list of companies taken private in recent years.

Some investors welcome the privatisation attempts as they are opportunities to cash out of a stock. Others may resent privatisations as they would result in a smaller pool of listed companies in the market.

Regardless of what your view may be regarding privatisations, it’s worth looking at some important reasons why a company may take the privatisation route. Here are three big ones.

Too cheap to ignore

Some privatisations involve a company’s major shareholders wanting to buy it over. In such cases, one of the most obvious reasons – that is rarely included in the official list of reasons – is that the stock price of the company is just too low.

The main shareholders may feel that the market is not appreciating the true worth of the company and that it is a good time for them to fully purchase valuable assets at a bargain.

Availability of cheap funding

We are currently in a low interest rate environment and this may be a reason driving the occurrence of privatisations – companies and funds are able to gain easy access to cheap funding.

To a fund or a company looking for acquisition targets, it would be attractive for them to go on a shopping spree if they can find assets that would produce a higher return than their cost of funding.

Relisting for higher valuations

We are living in a globalised world. It is just as easy for a company based in Myanmar to list on Singapore’s stock market as it is for a Singapore-based company to list on Hong Kong’s market. Therefore, the management or main shareholders of a Singapore-listed company may want to delist its shares if they can relist the same shares at a more attractive valuation in another market.

There have been cases of Singapore-listed companies delisting, only to end up re-listing in Hong Kong. It is not uncommon, and if you are the main shareholder of a listed company here, you might just do the same if you can find a more appreciative audience for your company.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.