19 July 2013

Privatization - motive behind

I have seen some delisting of good counters due to privatization. It happened more during bear market. So what are the reasons behind for the major shareholders to privatize it? Below are the points I can think of:

1. The controlling shareholders think that the current market value is cheaper than what they worth. Low PE could be a justification for under estimated counter. 

2. There could be any major projects coming up that might give negative short term impact to the counter, but the controlling shareholders can benefit from there in Long run. 

3. Possible take over action by the competitors, and hence a step taken by the controlling shareholders. 

4. There is no point listed in the market as the market valuation is so low that it could be expensive when raising equity fund through private placement or new shares listing. The management see no points keeping the listed status. 

So when you ever encounter any shares has little float in the market, and it is having a good fundamental, please do not be surprised when the controlling shareholders decide to privatize it. You may or may not be benefited from there. It depends on your purchasing price and the price the main shareholders willing to buy from you. 

A good news is that, as long as it is not reaching 90% controlling stake, you may still have a chance to reject the offer. Anyway the chances of winning over the bid from controlling shareholders are slim if they can keep on raising the price of privatization and winning supports from other investors. 

What happens if you do not sell your shares after the privatization? You might be able to retrieve information from the management or try to persuade them to buy over from you even though you are not able to do it over the open market. But I think it's really up to the major shareholder to decide as it has become a private limited. 

Hope this article can help you understand more on privatization. 

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