What is delisting?

When it comes to delisting, what comes to mind? For example, Didi announced its delisting only half a year after its listing, setting a record for the fastest delisting in history. Luckin Caffeine was delisted by Nasdaq due to false claims, and LeTV also announced its delisting. It all sounds like some not-so-good things. So what exactly does delisting mean? Why do companies choose to delist? Let’s discuss the matters related to delisting and understand what delisting is.

1. What does delisting mean?

In English, it is called "delisting," which means that a company's shares are officially delisted from the stock exchange and are no longer listed and traded on the exchange. This may be because the company does not meet the exchange's listing requirements, its financial condition deteriorates, it violates trading rules, or it voluntarily chooses to withdraw from the listing. Delisting usually means that investors will be unable to buy and sell the company's shares on the open market, while the shares may continue to circulate on over-the-counter exchanges or other trading platforms.

To put it simply, once it is delisted, the company's shares can no longer be traded on the open market. When we go public, we often see companies hyped up and enjoying a positive outlook, but once delisting is mentioned, alarm bells usually sound. Delisting often creates the impression that a company is in trouble.

2. What are the types of delisting?

1. Voluntary Delisting

   The company itself chooses to delist from the stock exchange. This may be because the company finds that it is no longer in its interest to be listed on the exchange where it was listed, or due to reasons such as privatization, mergers, etc.

2. Involuntary Delisting

   Exchanges or regulators force a company to delist, usually because of the company's violation of listing regulations, deterioration of financial condition, violation of exchange rules, etc.

   One common reason is that the company is not doing well. The Securities Regulatory Commission and exchanges will require companies to meet a series of indicators to ensure that they do not pose excessive risks to the public. If the company's performance is poor and fails to meet the requirements, the exchange or the China Securities Regulatory Commission will force the company to delist. Different exchanges have different rules. For example, A-share companies that have suffered losses for two consecutive years will be marked as "ST," and companies that have suffered losses for three consecutive years will be delisted. The Nasdaq and New York Stock Exchange have a rule that if a company's stock price remains below one dollar for thirty consecutive days, it will receive a delisting warning. If it does not correct itself within ninety days, it will be forcibly delisted.

3. Delisting due to bankruptcy

   The company was forced to delist due to bankruptcy. In this case, the company may be liquidated or reorganized.

4. Other Exchange-Mandated Reasons

   The exchange may have a set of regulations that require companies to maintain certain financial health and transparency. If a company fails to meet these requirements, the exchange may force it to delist.

5. Delisting due to a merger

   A company may choose to delist due to a merger with another company, or it may be forced to delist due to changes in the shareholding structure of the merged company.

3. Why do some companies choose to delist?

The benefits of going public include the ability to raise capital, cash out, and enjoy unlimited attention. So why do some companies choose to voluntarily delist? This involves not only various benefits of listing but also corresponding costs. In addition to the cost of time and money, there are also various management and maintenance costs after listing. One of the most important, and often overlooked, hidden costs is that companies are easily swayed by short-term interests. Financial reports must be released every quarter and every year, and management naturally does not want to see any unsatisfactory financial reports because this will affect the market's expectations of the company and lead to a decline in the stock price.

If a company hopes to invest in high-risk but potentially high-return projects in the future or attempts to launch some new business models, it may not see returns in the short term. In this case, next quarter's earnings report is bound to be daunting. So is there a way to develop new business and consider the long-term development of the company without being restricted by short-term interests or avoiding being kidnapped by public opinion? This involves delisting. In this case, the company can spend some funds to repurchase all the publicly traded shares on the market, turning itself into a private company again. This way, the company doesn't have to report new plans to the public and doesn't have to explain much to the public. Therefore, voluntary delisting also has a popular name, called privatization.

Privatization

There are many cases of company privatization. Let’s take a look at a familiar example: the Dell Computer.

Dell went public as early as 1988 and has always focused on selling personal computers. In 2013, founder Michael Dell discovered that tablets and mobile phones had a huge impact on the personal computer business. In 2012, their performance fell 7%, missing sales expectations for seven consecutive quarters. Dell realized at the time that the company would need time to reorganize and transform its business, but this would require a lot of investment, and the money invested might not bring returns in the short term. So Michael Dell decided to privatize Dell to make it easier to carry out long-term development and reform.

Generally speaking, when a company goes public, it needs financing. But if the company chooses to delist or go private, it will need to use these funds to return investors again and buy back investors' shares from the open market. In order to achieve this goal, Michael Dell found a private equity firm, Severelly Partners, to jointly take Dell private. Dell's market value at the time was approximately $25 billion, making it one of the largest privatization cases at the time.

In the initial privatization stage, Dell did not find a clear business direction and continued to sell computers. Because it is a private company, detailed performance data is not available to outsiders. According to US media reports, when it delisted in 2013, Dell’s profit that year was US$2.4 billion. But by 2015, Dell had lost $1.2 billion. Although the past two years may not have been easy for Dell, due to privatization, he can block out the interference of external public opinion and concentrate on finding new business directions.

It wasn't until 2015 that Dell finally found this new direction. He is optimistic about a company called EMC, which is mainly engaged in providing cloud computing and data storage services to enterprises. Dell believes that EMC is very strong in software and enterprise resources, and Dell is also very good in hardware. The merger of the two will form a strong alliance. Therefore, Dell decided to acquire EMC and integrate its business.

Although this was an acquisition, EMC's market value at the time was $45 billion higher than Dell's, so Dell had to borrow a lot of foreign debt. The acquisition proved to be a wise one. Dell's overall revenue, PC sales, did not fluctuate much, but enterprise services doubled in the period from 2015 to 2018. In addition, there is an interesting aspect of EMC's acquisition. Although EMC is a private company, it holds about 80% of the shares of the listed company, VMware. Therefore, after Dell acquired EMC, it was actually equivalent to taking 80% of the equity of a listed company.

There is a way to go public called backdoor listing, or reverse takeover. Since Dell controls VMware, which has already been listed, it is like he has a shell that can be used for backdoor listing when needed. Sure enough, in early 2018, Dell announced a reverse takeover and was listed again. At the end of 2018, this merger and reverse takeover were successfully completed.

Dell's privatization can be said to be quite successful and was even named the "Single Case of the Century" by Forbes. The transaction has a market value of US$67 billion, a leading position in the IT industry. The merger of Dell and EMC brought new opportunities to Dell and allowed it to be reborn.

After the acquisition of EMC, Dell's equity was not diluted. Michael Dell was worth US$3.8 billion when it was privatized in 2013, and when it was listed again in 2018, it was worth US$32 billion, holding half of the shares and nearly 75% of the voting rights. This once again proves the value of delisting for founders to focus on business research in a relatively private environment and make strategic adjustments for the company's long-term development.

In addition, there are many examples of kidnapping to avoid short-term interests. One of the clear cases was Tesla in August 2018.

At the time, Tesla CEO Elon Musk tweeted that he was considering taking Tesla private at $420 per share. He believes that after a company goes public, it needs to release financial reports frequently, and these financial reports will be affected by stock price fluctuations, which is very annoying. Tesla has also been attacked by some short-selling companies, resulting in constant negative news and posing a threat to Tesla's long-term development. So Musk is considering taking Tesla private to avoid being disrupted by market fluctuations and attacks.

Although Tesla was ultimately not privatized due to investors' shareholding requirements and market considerations for the Model 3 at the time, this case reflects that many leaders had considered the possibility of going private. Leaders like Musk have this idea of privatization in mind, but not all examples end up being put into practice.

In this case, when Musk tweeted, Tesla's stock price was around $350, and he announced that he would take it private at $420, which involved a large-scale price negotiation. The day after the tweet was posted, Tesla's stock price suddenly rose by more than 6%. This also shows that when a company considers voluntary delisting and privatization, it usually gives shareholders a premium; that is, the price is higher than the current stock price. Because if the bid is lower than the price of the stock in the hands of shareholders, then they may not be willing to sell.

Voluntary privatization is usually a good thing for stock holders, especially retail investors, because it tends to drive up stock prices. In the Tesla case mentioned above, the company considered privatization from its own perspective and found capital, such as some private equity funds or investment companies, to support this plan.

There is also a capital-led form of privatization, namely capital-led privatization. In this case, the delisting of a capital-led company often includes a series of operations, such as reducing costs, promoting globalization, increasing the company's valuation, and ultimately, the company may be resold or listed again. This situation is more like a capital game in the primary market, where capital achieves delisting by buying out the company. This form is more common in voluntary delisting. Some companies frequently enter and exit under the operation of capital. A representative case is Burger King.

Burger King is a very interesting company. It has gone through a series of listings, delistings, re-listings, and re-delistings. Throughout this process, not only the evolution of the business model but also the influx and departure of capital have occurred multiple times. Especially in the catering industry, especially in the fast food field, the business model has become quite mature, and the products and models have become quite similar. In the later stages of the development of this industry, the space for innovation is relatively limited, and it is mainly operated with some capital to carry out a series of optimizations.

Burger King was successfully listed on the New York Stock Exchange in 2006 with the help of several capital firms, such as Goldman Sachs, Bain, and Tero. However, Burger King experienced a trough period after its listing, with relatively sluggish marketing and mediocre performance. The main private equity shareholder at that time, the private equity company, wanted to get rid of the company and looked for the Brazilian 3G capital investment company. 3G Capital has extensive experience in the consumer goods industry and is known for its mergers and acquisitions and operational optimization, especially in beer brands. In 2008, 3G Capital spent US$4 billion, of which US$1.2 billion was its own investment and US$2.8 billion was borrowed from debt, to buy Burger King for privatization.

After privatization, 3G Capital used its experience to carry out drastic reforms at Burger King. First, they turned Burger King from an independent brand into a chain, driving franchise business and rapidly expanding the brand's size and influence to compete with McDonald's. Secondly, in terms of marketing, they focus on promoting Burger King's flagship product, Whopper (Burger King's signature burger), attracting consumers by sponsoring Super Bowl ads, inviting celebrities to participate in Burger King activities, etc. Burger King has also launched a campaign called Bowcamppainking, where you only pay a penny to order food using the Burger King app within a range of McDonald's. This strategy of clearly competing with McDonald's allowed Burger King's performance and influence to achieve rapid improvement two years later.

In order to increase the market value, 3G Capital planned to list Burger King again, so it found another big guy in the capital market, Bill Ackman, to conduct a backdoor listing. This process is not unfamiliar, and we have mentioned it before. However, this is not the end. 3G Capital believes that Burger King still has potential and will continue to expand through international strategies. They took a fancy to Tim Hortons, a Canadian coffee chain brand, and planned to merge it with Burger King. This resulted in Burger King delisting again and merging with Tim Hortons into a new company, Restaurant Brands International, listed on the Toronto and New York Stock Exchanges. By 2019, the newly merged company's stock price had doubled, and its market value had reached $30 billion.

Through these four or five years of operation, 3g Capital has successfully transformed Burger King from a brand selling burgers into a fast food chain tycoon with more than 7,000 stores in North America. Their initial cash investment of US$1.2 billion has now increased in value to US$22 billion, a full 20-fold increase. In the deal to delist Burger King and merge it again, 3G Capital also successfully attracted the famous investment tycoon Warren Buffett. This is not the first time they have worked together. As early as 2013, they took Heinz private and then merged again with the public company Kraft in 2015. Such capital intervention and privatization are only the first steps in the entire process. The subsequent goal is usually to increase the value of the company, either by going public again or by exiting in other ways.

stock buyback

When the company's stock price is low, the company has another option, which is not to go private but to buy back its shares in full. In this case, the company can use the cash on hand to buy back shares, which is called a "share buyback."

A typical example is Apple, which has spent more than $400 billion on repurchasing its own shares over the past decade, making it one of the largest repurchases in the U.S. stock market. Stock repurchases are an effective means of instilling confidence in the market and investors, showing that the company has sufficient cash flow and that the price of the stock repurchases is worthwhile. Although some economists believe that it is difficult for companies to judge whether the stock price is overvalued or undervalued, stock buybacks do demonstrate the company's determination and confidence in the market. Apple's market value once reached three trillion U.S. dollars. In addition to strong performance and abundant cash, large-scale share repurchases also established a high level of confidence in the market.

4. After a company is delisted, can it be listed again?

In theory, it is possible, and the original intention of many companies to delist is to re-list after rectification, but the following steps need to be taken:

1. Rectify and improve

   Companies usually need to rectify and improve after delisting to solve the problems that led to the delisting. This may include improving the financial position, strengthening the governance structure, ensuring compliance with listing requirements, etc.

2. Meet listing requirements

   The company must comply with stock exchange requirements for relisting. This may include requirements for financial metrics, transparency, governance structure, ownership structure, etc.

3. Apply for relisting

   The company needs to submit an application for re-listing to the relevant stock exchange. This usually requires providing detailed information and documentation to prove that the company has taken the necessary steps to resolve the previous issues.

4. review and approval

   The stock exchange will review the company's relisting application to ensure that the company meets the listing requirements. This may involve approval by the stock exchange's listing committee or other relevant authority.

5. Exchange announcement

   If the relisting application is approved, the stock exchange will issue an announcement announcing that the company will be listed again.

5. The relationship between bankruptcy and delisting

Regarding the relationship between bankruptcy and delisting, bankruptcy liquidation means that the company is completely closed and assets are sold to repay debts, which may result in greater losses for shareholders. Bankruptcy and reorganization mean that when a company has poor operating capabilities and is unable to repay its debts in the short term, it reorganizes it by negotiating a deferral of repayment. Although bankruptcy does not necessarily lead to delisting, in many cases, if a company files for bankruptcy protection or bankruptcy reorganization, it usually means that its operating conditions are not good.

During the epidemic in the United States, a well-known large-scale shopping mall chain, J. C. Penny, faced severe economic difficulties and had to file for bankruptcy and reorganization. It eventually withdrew from the stock market and added a "q" to the end of its stock code. Even if a company has been delisted, shares can still be traded as long as it is still operating and has not been liquidated. Typically, these stocks are moved to the over-the-counter market, known as OTC (over the counter). Some might describe these types of markets as "pink sheets" or "paint sheets," often associated with low-priced junk stocks, and such stocks may actually still have new opportunities.

Take Luckin Coffee as an example. This is a frequently mentioned case. Unlike J. C. Penny, Luckin was not delisted due to performance issues but because of widely exposed financial fraud. This behavior was a serious violation of regulations, and the company was eventually forced to withdraw from the stock market. The exposure of Luckin Coffee’s financial fraud began in 2020. The company denied it at first but had to admit its mistake after the investigation revealed the truth. At the end of May 2020, the Nasdaq exchange ordered mandatory delisting, but if you hold the company's shares before then, you still have the opportunity to sell them.

In the event of a forced delisting, stocks typically decline rapidly. However, some investors may choose to hold on, thinking the company may recover and return to the market in the future. For such investors, a depressed stock price means that even if they sell, they won't be able to recover much money. Therefore, they may choose to stay and wait for the opportunity for the stock to rebound.

For companies like Luckin Coffee, even though they have been delisted, they are still trading through the over-the-counter market. In this market (OTC market), liquidity may be poor, and trading hours may be limited and can only be conducted on specific dates. Although forced delisting typically results in a significant drop in share price, investors may choose to hold on if they believe the company has hope for a comeback.

In the more than a year since Luckin Coffee was delisted, its performance in the OTC market has been quite impressive, with an increase of more than 500%. The company said they are actively preparing to return to the main board. In terms of business, although Luckin Coffee has been delisted, it continues to operate, opens new stores, has undergone a major leadership change, and its performance has also rebounded. Faced with the problem of financial fraud, the company adopted a positive attitude, recognized the error, and resubmitted its 2019 financial report. In addition, the company has reached a settlement with the U.S. Securities and Exchange Commission (SEC) and paid a fine of approximately RMB 1.2 billion. In February 2021, Luckin Coffee also filed for bankruptcy reorganization in hopes of reaching a settlement with creditors. If the creditors agree not to pursue liability, the company may return to the main board listing again. Therefore, Luckin Coffee's positive performance shows that even if it is an involuntary delisting, there is still the possibility of relisting.

6. Conclusion

The above is the relevant content about what delisting is. There are many reasons for a company's delisting. Each situation has its own unique reasons. Some are led by the company for long-term development, some are led by capital, and some are led by capital. It is led by management buybacks. In either case, when a company autonomously decides to take this step, the stock price usually rises. For retail investors, both voluntary delisting and involuntary delisting will have an impact on stock prices. Voluntary delisting is generally considered a good thing because a company's willingness to spend money to repurchase shares shows that the company is financially sound and that they believe the repurchase price is a good one.

Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.