What are the advantages and disadvantages for a company going public? By Kesavan Balasubramaniam Updated December 27, — 9: An initial public offering IPO is the first sale of stock by a company.
Determining the right course to take is a major decision, and experienced counsel can help explore options and assist with private capital alternatives.
Advantages of an IPO Going through an IPO and being a public company may provide significant advantages for the company and its shareholders. There is the obvious infusion of cash, it may mean easier and quicker access to equity and debt markets in the future, and liquidity for pre-IPO shareholders and the increase in stature of the company in the eyes of the public.
By having publicly traded stock, the discount attached to stock of private companies no longer applies. The result of an IPO is a significant and immediate infusion of cash into the company.
These uses of the proceeds can be for a variety of purposes. For example, the company may use the money to expand its inventory, property and equipment base, to reduce debt, further research and development or expand its services.
Using stock as consideration for acquisitions also provides sellers an opportunity to participate in the future growth of the combined organization. Being a public company enhances access to both equity and debt markets. The ability to use this process reduces both the time and expense of future equity financings.
As a reporting company, the transparency of its financial position and operations makes it better suited to obtain debt financings.
The infusion of cash from an IPO also enhances the balance sheet and makes the company a much stronger candidate for debt financings.
As a result, suppliers, vendors and lenders often perceive the company as a better credit risk and customers may perceive it as a better source of products or services.
The stature of a public company can also enhance its ability to attract top level executives and employees. The costs of an IPO include both the costs of engaging in the IPO process and the future and ongoing costs of being a public reporting company.
Costs go up as the amount raised increases. In addition to these initial costs, as a public reporting company, companies face a new array of securities laws and regulations, including the Sarbanes-Oxley Act and exchange listing requirements.
The costs are not just financial. The IPO process can take up to six months or longer. A myriad of compliance issues results from the IPO process. Following completion of the IPO, the company will be required to file quarterly, annual and current reports detailing its operations and announcing major events, both good news and bad news.
This disclosure includes detailed information about operations, executive compensation, financial results and significant customers and vendors.
The company cannot release information on a selective basis and must be careful to assure that the information it releases is accurate and complete. Company insiders and major stockholders also must comply with the Exchange Act requirements for reporting their stock ownership and prohibitions on short swing trading.
The changes to the securities laws resulting from the Sarbanes-Oxley Act have greatly increased the compliance issues that a public company must address with corresponding cost increases.
The certification requirements are backed up by possible criminal sanctions for violations. Independent directors cannot be officers, employees, major stockholders or outside service providers.
Independent directors must comprise the audit, compensation and corporate governance committees. Matters such as calling meetings and presenting proposals to stockholders must now be accomplished in compliance with SEC rules.
A major change brought about by Sarbanes-Oxley was empowerment of the independent directors. For most companies, particularly where the founders are executive management, the change in corporate governance structure resulting from being a public company may take some adjustment.
The stock price can be affected by a variety of factors, over which management may have little or no control. Reporting of quarterly earnings can lead to decision-making based on the short term result when a longer term perspective would be better for the company. The close ties between executive compensation and their personal net worth to near term operating results enhances the dilemma of seeking short-term results at the sacrifice of long-term perspective.
Wall Street can be impatient and, as with baseball pitchers, may have a tendency to look only to immediate past results rather than the big picture.
A loss of stock value can lead to dire consequences, such as stockholder lawsuits, loss of confidence in management and possible hostile takeovers. Lawsuits can stem from a sudden decline in stock price. Defense of a stockholder class action lawsuit can be very costly and distract management from running the business.
Recently, stockholder activism has been on the rise and dissatisfaction with directors including executive management on the board has been evidenced by stockholders withholding approval of directors. Various proposals, such as mandatory removal of directors who do not win a majority of stockholder approval in elections, are increasing the pressures on management to perform on a quarterly basis.
If a company loses favor with analysts and stockholders, its stock may suffer additional devaluation, which could lead to it becoming attractive to a hostile takeover bid. Recent developments Given the enhanced oversight and compliance responsibilities imposed on corporate officers under Sarbanes-Oxley in the wake of the dot-com boom and bust in the early s, a lot of the advantages of being a public company were offset.
Further, class action suits continued to plague public companies when share prices fell or published accounting information had to be restated given the discovery of prior problems.Public schools have some disadvantages related to the large number of enrolled students.
Sheer size alone makes it difficult for teachers, administrators and security officials to ensure school safety. There are more advantages of public transportation than disadvantages of it. It is because there are three reasons to support the statement.
These reasons are that environmental effects of using public transportation, cost of public transportation, and accessibility of public transportation. An initial public offering (IPO) is the first sale of stock by a company. Small companies looking to further the growth of their company often use an IPO as a way to generate the capital needed to expand.
Although further expansion is a benefit to the company, there are both advantages and disadvantages that arise when a company goes public.
Despite these and other benefits enjoyed by those who use their city’s public transportation system, there are a number of disadvantages to public transportation as well. Routing Public transportation, whether you are talking about a train system or buses, follow a preset route.
Advantages or Merits of Public Corporation The following are some of the advantages or merits of public corporation. 1. Autonomy: Public corporation is an autonomous set up. Therefore it enjoys considerable independence and flexibility in its operations.
Initiatives can be taken to tap opportunities and to improve efficiency. 2. Protection of public interest: Public corporations can formulate. An initial public offering (IPO) is the first sale of stock by a company.
Small companies looking to further the growth of their company often use an IPO as a way to generate the capital needed to.