The pros of staying private

Anil Agarwal, chairman of UK-based Vedanta Resources, recently announced that his family-owned trust Volcan Investments, decided to delist the company from the London Stock Exchange from October 1 after it got approval from its minority shareholders.

The $1.1 billion offer by Volcan Investments to buy out the listed natural resources company has now received approval to hold 92.31% of its shares. The trust, led by Agarwal, had made an announcement to buy out its remaining 33.5% stake in the London-listed company on July 2 in order to simplify the group’s structure. The delisting will narrow the group’s number of listed entities to two—Vedanta Limited and Hindustan Zinc, both listed in India.

Vedanta Resources is not alone in considering the delisting route. Elon Musk, CEO of US electric carmaker Tesla, too had expressed a view to delist the company from Nasdaq, but later said that it will remain listed. Many unicorn start-ups like Airbnb, Uber, and Slack too have not listed despite achieving a certain size and maturity.

Data from the World Bank shows that the number of listed companies has fallen from 8,090 in 1996 to 4,336 in 2017. There are many reasons for companies to remain private or delist these days. Finding equity finance, an important reason for companies to hit stock markets, is no longer a problem today. Rise of private funding from venture capitalists, banks, bond markets, angel investors including mainstream mutual funds such as Fidelity which invest directly in private business, means that there is enough money to go around. Then there are rich sovereign wealth funds looking to invest in mega private projects.

Secondly, delisting or remaining private means not being held hostage to filing mandatory quarterly earnings, analyst calls, and ups and downs of stock markets, especially when technological and political disruptions are creating challenges for those armed with the best of plans. An advantage of this is that top management can think long-term and do what’s best for the company in the long run.

Being listed means most of the management’s time is spent on thinking about quarterly results and how to better them. Not to forget the need to comply with the rules and regulations of various regulators which are becoming even more stringent as time passes. Then there are activist and foreign shareholders, foreign investors, etc., who are always ready to question the top management on each and every issue on grounds of transparency. Going private means that companies are no longer answerable to their shareholders, not open to media scrutiny or “short-termism”, but only to their own boards.

Thirdly, owners of start-ups, even those that have grown to a certain size and maturity are unwilling to list because they are waiting to be acquired by a bigger player at a handsome premium. As long as they are privately-owned, promoters can pocket all the money, otherwise they will have to share their wealth with other shareholders. So while a lot of money will change hands between the start-up owner and the new promoter, none of that money will percolate down to the public. Flipkart’s takeover by Walmart for nearly $16 billion is a case in point.