In the financial world, the most complex and important decision for a company is to decide whether to go public or not. For many companies, this decision represents a significant turning point in their trajectory as they move from private to public ownership. In this article, we will see the reasons behind companies going public, why some companies choose to give up their privacy to receive attention from public ownership, and the advantages and disadvantages associated with public ownership. We will also discuss the initial public offering, the IPO process, and the effects of shares on the stock market.
Why Do Companies Go Public?
There are various reasons why companies choose to go public. Every reason is associated with growth and strategic objectives. Some of the causes and advantages of going public are listed below:
- The main reason private companies prefer public ownership is that they require money. They can raise significant capital through the initial public offering and use that for expansion, R&D, acquisitions, and debt repayment.
- Going public improves pricing transparency and leads to the company's financial stability.
- By going public, companies expand into new areas, increase their growth efforts, and stand out in the competitive market.
- This also helps with talent recruiting and retention by attracting potential employees with the prospect of stock-based pay.
- Some other intrinsic benefits include increased visibility and reputation because customers and suppliers see public firms more favourably and as trustworthy.
- When it comes to asking for loans or negotiating loan terms, the company will be in a stronger financial position if it is publicly owned.
- Going public helps in the public domain and builds brand awareness, attracting more customers.
- Liquidity is another crucial reason because investors can monetise their capital through it.
- Public markets provide liquidity for selling shares and enable shareholders to sell their holdings and diversify their investment portfolios.
- A larger public may become aware of the company's products because of the publicity that initial public offerings (IPOs) provide. Therefore, companies can also get larger market shares.
- It also aids companies in recovering their investment in a firm they have invested in.
- Big companies generally look for mergers or acquisitions. They take money from their first public offerings to carry out this task and finance mergers.
- A company also gains value, recognition, position, and more funds for future merger and acquisition agreements after an initial public offering (IPO).
Disadvantages of Going Public
Despite having so many advantages, public ownership comes with some disadvantages. A list of the disadvantages of going public is given below:
- Going public requires excessive money, like in legal bills, compliance, underwriting commissions, etc.
- It also involves a heavy administrative load from ongoing reporting and requirements for compliance.
- Industry trends, geopolitical events, and economic conditions in public markets affect stock prices.
- Public ownership can also affect shareholder's confidence and stock prices.
- Going public results in losing ownership of a company. Companies usually lose control and power over decision-making decisions.
- Publicly traded companies go through detailed examination and inspection. They have to provide comprehensive financial and operational data. Therefore, it becomes a disadvantage for companies not wanting to share such information in public records.
Importance of Initial Public Offering (IPO)
The Initial Public Offering is the primary step towards ensuring accelerated growth for a company, as it helps the company raise funds. A company needs an initial public offering for Investment in new projects and debt reduction. IPOs also help in expansion by increasing the company's exposure and legitimacy, even improving its reputation in the marketplace. The listing of securities is an essential part of going public. It involves putting shares on the stock market and allowing free trading. An IPO involves the public in the company's expansion because the public can assess its value and determine its vulnerability to failure through its shares on the stock market. The IPO process helps a company develop by improving its visibility, liquidity, and access to future capital markets.
Conclusion
A business’s choice to go public is crucial to its sustainability since the choice is affected by and concerns vital factors such as finance, expansion, and strategic goals. The benefits of an initial public offering (IPO) include attracting talent and attaining greater visibility and liquidity in the market. However, shared ownership may also hinder innovation and growth if and when ample funding is not readily available. Managing the IPO process is a complex and laborious task.