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Why Privatise A Listed Company?

Recently, a few companies have proposed to delist. Existing shareholders will wonder if they should accept the offer, which is usually at a premium, or to hold on to their shares.

But before making a decision, investors should know why there might be a privatisation offer in the first place.

Higher cost associated with being a publicly traded company

Although there may be varying reasons why a company may choose to go private, one big reason that is often cited is the high cost associated with being a public company.

It is well known that the cost of undergoing an initial public offering is often huge, due to underwriting and legal fees. However what many investors may not be aware of is that the ongoing cost to keep a company public is also, in fact, significant.

In an Ernst and Young study conducted in 2011, US listed companies spent $2.5 million annually to maintain their status as a public company. These additional costs could be related to additional compensation to the Chief Financial Officer (CFO) and maintaining an in-house investor relations executive. There are also additional costs associated with quarterly shareholder events.

Restructuring the company

Acquirers of the company may also wish to privatise a listed company in a bid to streamline their operations or to restructure certain aspects of the business.

It is quite often that a company may decide to acquire a competitor’s business in a bid to grow its market share. We frequently hear the term “synergy” being thrown around in the acquisitions world, as companies try to justify their purchase to shareholders. These synergies may be in the form of maximising a company’s technology, database or through pure economies of scale.

Management can focus on the long term

Private companies may be able to better focus on long-term goals, rather than shareholders short-term demands. This means a private company can better focus on the business’ long-term competitive positioning, without having to worry about meeting short-term goals at the same time.

The Foolish takeaway

A privatisation offer is usually priced at a premium to current share prices. This is because the acquirer is willing to offer a higher price for the company. This can be due to the factors of lower cost, a more focused business approach or beneficial restructuring of the business.

As investors, we need to be familiar with the reasons behind a privatisation offer before we decide.

Meanwhile, for more (free!) investing insights, sign up here for your FREE subscription to The Motley Fool's investing newsletter, Take Stock Singapore. It will teach you how you can grow your wealth in the years ahead.

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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 Jeremy Chia doesn't own shares in any companies mentioned.