Going Public

An initial public offering (IPO) or stock market launch is the first sale of stock by a company to the public (Ojala, 2012). It is a public offering (Draho, 2006). An IPO in which a company sells its unissued securities and receives all the proceeds in the form of additional capital is called a primary offering. Alternatively, an IPO in which securities that belonged to the owners of the company are sold, and in which the owners receive the proceeds, is called a secondary offering. In a third option, the offering may be combination of the two, benefiting both the owners and the company. (Ernst & Young, 1995), (Kleeburg, 2005)

As the result of an initial public offering, a private company turns into a public company (Frederick D. Lipman, 2009). The process is used by companies to raise expansion capital and become publicly traded enterprises.

Going public:

- Attract investors: the established company can answer this question with historical sales data, while the early stage company must use market research projections and demonstrated product superiority. In fact, the early stage company usually qualifies as an IPO candidate because of the uniqueness of its product or service.

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- The demand for initial public offering can vary dramatically, depending on overall market strength, the market’s opinion of IPOs, industry economic conditions, technological changes and many other factors.

Benefits and Opportunities of Initial Public Offering

Going public can provide many benefits and opportunities. The benefits of going public are many diverse. Some of the most attractive benefits include: (Kleeburg, 2005), (Ernst & Young, 1995)

 Improve Financial Condition. The sale by the company of shares to the public brings money that does not have to be repaid, enhances a company’s financial condition immediately.

 Greater Marketability. Once a company goes public, the owners often find themselves in a new and more favorable position.

 Improve Value. The value of the stock may increase remarkably, starting with the initial offering. Shares that are publicly traded generally command higher prices than those that are not. There are at least three reasons why investors are usually willing to pay more for public companies: (1) the marketability of the shares, (2) the maturity/sophistication attributed to public companies, (3) the availability of more information.

 Diversification of Personal Portfolios. Going public makes it possible for shareholders to diversify their investment portfolios.

 Estate Planning. Going public also helps with estate planning because the liquidity of shareholder’s estate is increased by the sale of shares. Having an existing public market for shares retained also makes it easier for the company to hold future secondary offerings of shares.

 Capital to Sustain Growth. The net proceeds from the sale of shares in a public offering provide working capital for the company – an obvious benefit. The

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company can use this capital for general corporate purposes or apply it to more specific project.

 Improve opportunities for Future Financing. By going public, a company usually improves its net worth and builds a larger and broader equity base. The improved debt-to-equity ratio will help you borrow additional funds as needed or reduce your current cost of borrowing.

 Listing on a Stock Exchange. A goal of many companies that go public is to be listed on stock exchange. A listing facilitates trading in your company’s stock and fosters public recognition because listed companies are generally more closely watched by the financial press.

Drawbacks and Continuing obligations

The potential benefits must be weighed against the drawbacks and obligations of going public. In many cases, you can minimize the impact of these disadvantages through thoughtful planning backed by help of outside advisors.

 Loss of Control. Depending on the proportion of shares sold to the public, the previously private stakeholders may be at risk of losing control of the public company, now or in the future.

 Sharing the Company’s Success. By contributing their capital, investors share the risk of the business – but they also will share the company’s success.

 Loss of Privacy. Of all the changes that occur when a company goes public, perhaps none can be more problematic than the loss of privacy. When the company goes public, the Securities and Exchange Commission (SEC) requires it to disclose much information that private companies do not ordinarily disclose.

 Limiting Management’s Freedom to Act. In going public, management agrees to surrender some degree of freedom.

 Periodic Reporting. As a public company, the company will be subject to reporting requirements of the SEC – quarterly financial reporting, annual financial

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reporting prompt reporting of current material events, and various other requirements such as reporting sales of control shares and tender offer.

 Initial and Continuing Expenses. Going public can be costly and will call for tremendous commitment of management’s time and energy. The largest single cost in IPO is ordinarily the underwriter’s discount or commission, which generally ranges from 6 to 10 percent of the offering price.

 Limits on Major Shareholders. Controlling or major shareholders of a public company are not free to sell their shares at will. The SEC has restriction on when and how many shares insiders may sell. The company must be aware of these restrictions when it plans an IPO.

 Fiduciary Responsibilities. When a business is private, the money the company invests or puts at risk was the company’s own liability. Once company is public, the money and risk now belong to the shareholders, to whom the company is now accountable.

Advantage and Disadvantages of Initial public offering Advantages:

 Access to Long-Term capital. The company expands by reinvesting its undistributed earnings and by looking to its owners, banks or institutional lenders.

 Improved financial condition. When company sells its stock to the public, it receives permanently invested equity funds that improves its financial condition and increase its borrowing capacity.

 Simpler access to Subsequent capital. Once the company registered in SEC, the processing of succeeding issues ordinarily involves less onerous requirements.

 Prestige and Public awareness of Business. The more widespread the distribution of shares, the greater the public’s awareness of the company’s products or services.

 Established Value for Securities. With publicly held shares, the daily market stock quotations show the value that the investing public places on those shares.

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Disadvantages: The biggest disadvantage of IPO's is that there is typically a lot of paperwork. You have to file quarterly reports with the Securities and Exchange Commission (SEC). (Lybrand, 1992)

 Lack of operating confidentially. Some particularly sensitive areas of disclosure are the remuneration of officers and directors; the security holdings of officers, directors and major shareholders; all the detail information.

 Pressure for Short-Term performance. In a publicly held company, management is under constant pressure to balance short-term demands for growth with strategies that achieve long-term goals.

 Demand for dividends. As a public company, shareholders may demand that management establish a regular dividend policy.

 Possible Loss of Management control. If more than 50% of the company’s shares are sold to the public, the original owners could lose control of the company.

 Initial and Ongoing costs. The process of going public is expensive and time consuming. The financial statements must be audited by an independent public accountant.