Have you ever wondered what would happen if any of the companies you invest in through a portfolio suddenly delisted from the stock market?
Do you know what would happen to your shares? Armando, the protagonist of such a situation, is today a case to learn from. A few years ago, the great American computer company, Dell, decided to delist from the New York Stock Exchange and become a private company. It did so under cover of large loans and financial support from other partners.
It meant that all the minority investors who had put their money into its securities were no longer shareholders or holders of those instruments. Armando had started investing at that time, and the event alerted him because he had shares in Dell. He wondered, not without despair, what would happen. Indeed this is a question that any investor will have asked himself throughout his investment career. And if not, it’s not too late to understand the process.
Public vs. private
A public company is a company listed on the stock exchange. Therefore, beyond its owners and majority shareholders, there are also minority shareholders who do not make significant decisions about the company.
If you invest in company stocks, you own a small portion of all those companies in which you have put some money through equities. In general, publicly traded companies go public with an Initial Public Offering and then stay there forever. It is a way to have fresh capital on an ongoing basis.
However, the majority shareholders of a company may decide to sell it or that another unlisted company acquires the firm in question. What then happens to the minority investor? It was the question Armando asked himself in 2013 when the news announced Dell was going private.
The company will have to pay its minority shareholders for all the shares they hold, at a price they benefit from, not below their market value at the time of purchase. In the meantime, the company is retiring all its shares through operational and legal mechanisms. It was a high cost for the company and its owners, but it was to protect those not involved in the decision.
But what happens if another company absorbs a company I own shares in?
The only thing that happens is the shares of the company you bought are exchanged for shares of the company that has absorbed yours. Yours disappear, but you do not have any loss since you receive others in exchange. It is a subject with which people sometimes try to scare investors. Either by citing well-known companies that “no longer exist, and therefore the shares of those companies no longer exist.”
For example, Banco Central and Banco Hispanoamericano no longer exist, but that does not mean that the people who bought shares of these two banks lost everything. People who once bought shares of Banco Central or Banco Hispanoamericano are now shareholders of Banco Santander if they have not sold their shares.
Hidroeléctrica Española and Iberduero also disappeared, but their shareholders became shareholders of Iberdrola. The shares of Catalana de Gas and Gas Madrid no longer exist either. Still, all the people who held shares in these companies and have kept them are now shareholders of Gas Natural Fenosa.
Lessons in investments
Five years after Dell bought back its shares, went public, and took on debt to heal its finances, it returned to the headlines with a news story that Armando still remembers:
“Dell, the world’s largest private company, will be listed on the New York Stock Exchange after launching an Offer to Purchase DVMT’s securities in a cash and stock deal valued at $21.7 billion, 18.7 billion euros. DVMT, the company, was created to finance the merger with EMC in 2016, then issued follow-on shares referenced to VMware, one of the EMC group companies.”
Armando didn’t think twice and reinvested in the company. Market fluctuations are constant. It is an environment where volatility is present. But it is possible to adopt different beneficial strategies.
A financial advisor is an essential help, although it must be accompanied by knowledge about the environment in which your money is invested. That was Armando’s most important lesson from the Dell case and that he shares with investors today.