Why do Companies Opt for Public Listing?

An understanding of the rationale for companies to go for public listing.

Millennials’ interest in the stock markets has skyrocketed and has been further fuelled by the pandemic. With less spending on entertainment and travelling (due to restrictions), and having more savings and petty cash on hand, retail investors are storming to the Stock Markets for some extra side income. Who will say no to more money, right? ….right? (Well …at least I won’t for now)

Being a millennial myself, I was pretty late on the trend and much of a safe player when it comes to investing. I like to do my due diligence and research for better understanding.

Well, the stock markets has no relation to my previous profession so it is fair to assume my financial knowledge is pretty limited.

So, to all stock market dummies out there, let’s start with why Companies go for Public Listing? What are the advantages and disadvantages?

WHY DO COMPANIES GO PUBLIC?

· To raise capital and potentially broaden opportunities for future access to capital.

· To increase liquidity for a company’s stock

· To acquire other businesses with the public company’s stock.

· To attract and compensate employees with public company stock and stock options.

· To create publicity, brand awareness, or prestige for a company.

· May be used by founding individuals as an exit strategy

ADVANTAGES AND DISADVANTAGES OF GOING PUBLIC

Advantages

• ability to raise capital quickly by reaching a large number of investors.
• increase liquidity
• generate publicity, thus increasing business opportunities. [ for the prestige of being listed on a major stock exchange. Also for the Credibility and visibility with the public is enhanced, as is the corporate image]
• help growing companies attract new talent by offering perks like stock options
• Public traded securities can be used as transaction currency or executive/employee compensation
• Lower cost of capital relative to debt financing

Disadvantages

× Time-consuming (During this time, the company’s management team is likely to be focused on that IPO, which could cause other areas of the business to suffer)

× High expenses: it costs money to go through with an IPO, from financial service and underwriting fees to filing fees.

× Extensive management resources are required. [once a company goes public, it becomes subject to a host of additional reporting and disclosure requirements, all of which also cost money]

× IPOs lead to greater public disclosure and scrutiny: (financial results, share price, management and director performance, executive compensation, corporate governance practices and insider trading information will all be available to the public even your competitor)

× Disclosure requirements, such as filing quarterly and annual financial reports.

× Transaction freedom is more limited (related party transactions for a public company are regulated, and listed companies are subject to stock exchange requirements, including requirements for shareholder approval of certain matters).

× When shareholders gain a significant ownership stake in a company, they can vote to override management decisions, or vote to get rid of managers and directors altogether. (under public pressure, companies sometimes make poor business decisions, sacrificing long-term growth for short-term profits.)