8622626-display-of-stock-market-quotesSimilar to how share buybacks can cause quite a stir in the investment community, an announcement that a listed company will go private can pique the interest of investors as well as it may signal an opportunity to extract a premium on a company’s currently traded market value. Whether you are an investor interested in reaping a quick payout by acquiring shares moments ahead of a delisting or a current shareholder determining whether to tender or hold onto your shares, it is first worth identifying whether the delisting is a voluntary decision based on sound business rationale or rather the consequence of a forced action at the hands of a public exchange.

The latter of the two scenarios does not bode well for the company and its shareholders as the company is likely plagued with structural issues that have caused the entity to no longer meet its listing requirements. Opportunities to obtain a profitable payout under such a scenario are unlikely if the company’s woes are widely known amongst the investing public even for the most tactful and opportunistic traders. In the worst case scenario, shareholders and uninformed opportunists may be relegated to accept a low price determined by the exchange. However, should a delisting be initiated voluntarily as part of a larger business strategy, a second look may be warranted and prove to be a highly profitable opportunity.

Prospective buyers should first determine whether the price offered for the publicly listed shares will generate sufficient interest amongst current shareholders. Though trading strategies that take advantage of the delisting phenomenon is well-documented and has proven wildly profitable, risks are plentiful and earning a nice premium is far from a sure thing. Should a delisting ultimately fail due to lack of interest in the offered price amongst current shareholders, it is conceivable that this may cause the stock price to plummet leaving newly acquired shareholders with a highly illiquid underperforming stock as opposed to a handsome return.

Current shareholders on the other hand should carefully weigh the offered price for their shares by the delisting company in conjunction with the future prospects of the firm along with valuations of peer entities in the industry. By doing so, one can gauge whether the offered price offers sufficient value for their corresponding stake in the entity. A hasty decision to tender shares at an inadequate price is ill advised especially if growth prospects for the company are strong and the offer price does not sufficiently reflect market value. Companies looking to go private have mustered up better offers in the past if there is a legitimate threat that their attempt to delist will not materialize.

In the end, the investment analysis that one employs when reviewing any company is likely not all that different from one that should be utilized when evaluating a company looking to go private.  Is the delisting entity under or over-valued relative to its peer group? What position does the entity hold in its industry in relation to trends in its sector? Is the company especially susceptible to macroeconomic changes? Clarity on these matters can shed the necessary light on whether current shareholders should tender their shares or prospective buyers should look to buy.

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