Business-Minded Legal Solutions

Key differences between privately and publicly held companies

Elon Musk’s $44 billion bid to buy Twitter shocked many by its scope as well as the billionaire entrepreneur’s plans to take the social media giant private.

Musk’s plan will remove Twitter from the New York Stock Exchange if the acquisition is approved. It is a move that illustrates differences between privately and publicly held businesses.

Basic components of taking a public company private

If the merger happens as expected, Twitter investors will receive $54.20 per share. Those shares would be canceled and no longer exist.  A big consideration for Musk, according to analysts, is that after the acquisition he will not have to answer to angry shareholders if he makes unpopular decisions on how to run the company. Some believe that removing owners from accountability can be risky, but others say it allows companies to make bold choices.

One of the most significant differences between public and private businesses is that the Securities and Exchange Commission requires public companies to file quarterly financial reports. Private companies are not required to disclose earnings information since they do not have publicly-traded stock.

On the other hand, one advantage for public companies is the ability to raise a large amount of capital quickly by selling stock or bonds. Private companies generally must turn to loans, private investors or other private sources of capital.

A common myth about privately held companies

One misconception is that privately run businesses are small, due in part to their limited ability to raise capital. However, Forbes recently released its annual list of top U.S. privately-owned companies,  which includes these five from the Houston area:

  • No. 45: Gulf States Toyota – $8.3 billion annual revenue
  • No. 48: Calpine – $8 billion annual revenue
  • No. 61: Tauber Oil – $6.7 billion annual revenue
  • No. 166: Fertitta Entertainment – $2.8 billion annual revenue
  • No. 219: BMC Software – $2.1 billion annual revenue

Thirteen privately run businesses from the Dallas-Fort Worth area also made the Forbes list.

Must privately held companies remain private?

No. Businesses can decide to sell shares to the public, provided they meet regulatory standards. Musk has already said he would likely consider taking Twitter public again in a few years. Critics say his plan has plenty of risks, namely losing advertisers, users and employees. But as Twitter’s only shareholder, Musk would have the ability to set his own agenda, which may include footing the substantial financial responsibilities himself or taking on other private investors.