Conclusion An initial public offering, or IPOis the very first sale of stock issued by a company to the public. Prior to an IPO the company is considered privatewith a relatively small number of shareholders made up primarily of early investors such as the founders, their families and friends and professional investors such as venture capitalists or angel investors. Public companies, on the other hand, have sold at least a portion of their shares to the public to be traded on a stock exchange. This is why an IPO is also referred to as "going public.
At the same time, there are a significant number of companies that are not limited in their success by the fact that they remain privately owned.
While going public may offer a number of benefits — not least in terms of funding and increased public awareness — not all IPOs are successful. Given the costs and significant changes in management and corporate culture resulting from going public, benefits and disadvantages have to be carefully weighed.
This article gives a short introduction to the main issues. Going public is one of the most critical decisions a company can make, as it will affect not only the financing, but also all other aspects of a company such as management flexibility, the decision making framework and business strategy.
Companies typically go public in an initial public offering IPOwhich entails the sale of equity in a company in the form of shares through an investment bank.
Subsequently these shares are traded publicly in the secondary market of a stock exchange. Going public may appear to be part of the natural development of a company, but it is not necessarily the only option.
There are a significant number of very large, successful privately-owned businesses worldwide that have rejected the idea of going public and maintained their private status. However, companies may find at some stage that they require additional financing sources and liquidity in the form of equity capital.
If private equity is either unavailable or too expensive, going public may be a viable alternative as long as the company meets specific criteria in terms of size, management, growth potential and market valuation.
Before a company can determine whether it is suitable for going public in terms of these market requirements, management should carefully weigh the costs and benefits of such a decision. Advantages of going public There are many reasons for going public and they will vary from one company to another, as will the benefits and costs involved.
Access to long-term capital Some companies choose to go public because it represents a new stage in their growth and development. The main reason to go public is to raise funds in a cost-efficient way to finance operating or growth objectives. If a private company goes public, it accesses an additional source of funds to the cash available from operations and borrowings.
At the same time funding is diversified and extended to a much wider investor base. The capital raised can be used to fund growth, investments, acquisitions or working capital needs, or to refinance existing debt.
More favourable financial status By selling shares to the public, a company increases its equity which can in turn be leveraged to finance growth.
It is likely that it may also lead to improved financing terms for the company in the future. Due to the greater visibility and tighter regulations to which public companies are subjected, a public company may also find it easier and cheaper to access other sources of finance, such as the bond markets, although to access these markets most effectively a credit rating may also be required.
Less dilution Most companies that go public will receive a higher price for their securities in a public offering than they would in a private placement or through any other form of equity financing. As a result a company will have to issue less additional equity to achieve any financing objectives.
This may give business partners and customers an increased sense of confidence in doing business with a company. It may be easier to source suppliers and a company may gain more weight when it expresses its opinion on regulatory matters with government bodies.
Personal wealth and owner liquidity Going public may also entail personal prestige for the founders of a private company. It will give shareholders of a private company the opportunity to convert their initial investment, which had limited marketability, into cash.
This may even lead into an exit strategy for the business owners, although this may be subject to any escrow or holding period requirements, as most investors would want the management of a company to stay for a certain amount of time to lead the transition to a public company. Employee incentives Stock options are a means of attracting and retaining key staff.
While this can be limited to executives, it may be applied to other employees. Potential disadvantages While going public may entail the above mentioned benefits, it is important to consider carefully the disadvantages that may be connected to a public offering.
Cost One of the main factors to consider in going public are the substantial initial and ongoing costs of such a process, which we will explore in more detail below.
The issuance of public equity is also arguably the most expensive form of funding, compared to straight debt or hybrid capital. While a successful offering may justify the expense, there is no guarantee of success, as effectively a large number of IPOs fail each year, principally due to volatility in the equity market conditions.
Time In addition to the total expense involved there is also a significant amount of management time involved in the process.
The preparation time for an IPO is significant, but going public will also require ongoing dedication, for example in terms of investor relations and meeting regulatory requirements. Management will require up-to-date information on company issues and must be available to present this to regulatory agencies, investors, analysts and the media.
This may mean that management and accounting information systems will have to be upgraded. Loss of privacy When a company reaches public status, it may be required to reveal highly sensitive information on a number of areas, ranging from company strategies, financial results, material contacts and key performance indicators to executive salaries and compensation.
The level of public scrutiny is distinctly different to that which is experienced by a private company. Reduced management flexibility Privately held companies have greater flexibility when making management decisions, as public companies must obtain the approval of the board of directors for many decisions and the approval of shareholders in certain situations.
This can lead to a more restrained management culture, hindering the unilateral and swift decision making which many private companies exercise.When going through an IPO there is going to be increased capital. A public offering will allow a company to raise capital to use for various corporate purposes such as working capital, acquisitions, research and development, marketing, and expanding plant and equipment (FindLaw, ).
An Initial Public Offering (IPO) is the first sale of stocks issued by a company to the public. Prior to an IPO, a company is considered a private company, usually with a small number of investors (founders, friends, families, and business investors such as venture capitalists or angel investors).
Other disadvantages to going public through an IPO would be disclosure, decisions based on stock price, regulatory review, falling stock price, and vulnerability.
Disclosure is another part . Assume Kudler Fine Foods is going public through an IPO Compare and contrast options and make a recommendation about which strategy the organization must choose.
o Strengths of each approach o Weaknesses of each approach o Opportunities of each approach o Threats of each approach. Considering an IPO to fuel your company's future?
For organizations looking to open paths to capital, particularly an IPO, it is useful to understand how quickly windows of opportunity can open and close. That way, you can leverage the right insights to make the right moves at the right times.
Going public is a huge decision for any company. Reasons for IPO. Going public in an IPO is a way for companies, including small businesses, to grow without using credit.