What Happens When A Company Goes Public?

What does ‘Going public’ mean?

When a private company decides to release its share into the stock market, it ‘goes public’. The term ‘going public’ basically refers to the Initial Public Offering (IPO).

The private company lets its ownership to be traded by the public through the stock market.

Usually, the company gathers capital by selling off the shares. This capital is used for the growth and expansion of the company. In addition, IPO serves as an exit strategy for the initial investors of the private company.

The process of ‘going public’ starts with pre-marketing strategies. It may be a public statement or an advertisement.

The underwriters offer the company its services and the company choose its underwriters for the listing and other activities related to the process of IPO.

The underwriter takes the legal responsibilities of the issuance of the new stock. Moreover, the underwriters decide the price and number of shares to be issued.

The main objective is to sell the shares to the public at a profit. However, an IPO is followed by a large number of advantages and disadvantages to the company which has been discussed below.

Advantages of going public

A private company goes public owing to the following benefits of IPO.

1. Quick Fundraise

It is a money-making exercise. The company can raise a considerable capital from a large number of investors within no time.

This money factor can contribute to the growth and expansion of the company.

Using the raised capital, the company may invest in their research and development, hire new employees, reduce debts or expand beyond geographical boundaries.

2. Publicity and Credibility

Releasing shares into the stock market brings the company into the spotlight. It provides exposure to reach out to a large number of potential customers.

In addition, stock market analysts, focusing on IPO, contribute to a great deal of attention received by the company after an IPO.

Thus, it increases the credibility of the company. Moreover, going public contributes to the prestige of the company.

3. Exit Opportunity

A company starts with investors such as friends, family, venture capitalists, etc. When the private company decides to go public, the investor may use it as their exit opportunity.

It becomes an opportunity to get back the significant money they had invested in the company. A small company does not witness substantial financial returns in its initial stage.

Thus, the investor can reap the fruit of their efforts through an initial public offering. However, in order to liquefy the investment through IPO, they need to sell off their shares.

4. Cut off the Cost of Capital

The cost of capital stands as an obstacle for every small-sized company. Raising the capital through loans would require paying high interest to the banks or financial institution.

In addition, one may have to give up the ownership to the investor to receive capital. An IPO reduces the cost of capital. During the IPO, the audits are conducted, which increases the credibility of the company.

Moreover, as the company becomes public, it receives the advantage of lower interest rates. Furthermore, the company can release subsequent shares in the market to raise funds for capital.

5. Stocks as a Payment Means

When a company goes public, it has the opportunity to treat stocks as a form of payment.

For instance, if the company is hiring new employees, stocks can be a tempting offer for hiring talented employees. In addition, the company can make use of the stock to make acquisition.

A company acquisition requires a significant investment which may render a billion of currency. Thus, the owner can offer the company stocks in place of cash to make an acquisition.

Disadvantages of going Public

An IPO can come with the following disadvantages to the company and its leaders, founder and initial investors.

1. Disclosures

A private company does not require to disclose its financial audit details to the public. But when it goes public, the company should yearly file its financial statement to the Securities and Exchange Commission (SEC).

A specific public accounting firm should prepare all the accounting details. This can become an expensive task as it requires hiring an auditing team to prepare the reports regularly.

In addition, the company needs to practice more rigid financial control and implement financial close processes quarterly and yearly.

Therefore, a public company requires a substantial investment in staffing a financial report team and an audit committee to undertake these processes.

2. Market Pressure

As the company goes public, the pressure of scrutiny and analysts in the market determining the value of the company pressurizes the leaders of the company.

Usually, a company leader should have a long-term vision for the company. In contrast, releasing stocks into the public market is a short term and profit-driven activity.

The company should meet the short-term goals, such as maintaining the standard of quarterly earnings in order to raise the value of its shares. Thus, the company leaders should now focus on short-term goals as well.

In case of failure, the share price faces a deep downturn. Therefore, as a consequence, market pressure may lead to a change in company leadership.

3. Loss of Control

As the stocks are released into the stock market, the public gets the opportunity to purchase the ownership of the company. Public shareholders invest money into the company by buying shares.

Therefore, they receive voting powers to influence the decisions of the company. Even though the founders and initial investors have ways to safeguard their share, the public shareholders may make the company change leadership.

This may happen if the leader seems incompetent to the public. Therefore, when a company goes public, the leaders potentially loses control over the critical decision makings.

The public shareholders influence the decisions by exercising their voting powers or through public criticism.

4. Cost of IPO

An initial public offering is an expensive affair for a company. The company has to pay a hefty cost to the underwriters. In addition, the recurring transaction cost of the IPO is a significant amount that the company has to spend.

The company has to invest on legal fees and fees for auditing firms to comply with the regulations set by SEC for a public company.

Moreover, the registration and printing fess contribute to the expenses of the company. Evidently, a private company incurs enormous expense when it decides to go public.

Conclusion

Just like every other aspects of life, IPO has its pros and cons. The article highlights the common advantages and disadvantages that follow when a company decides to go public.

Therefore, one should consider these facts before deciding to make a company public. You can find a large number of companies that have experienced growth after an IPO.

But there are companies in the record which has faced deep downturn after an IPO. Thus, a company should consider the expenses, management and other essential factors before taking the giant leap to become a public company.

FAQs

What is lock up period?

Lock up period is the period after an IPO when the initial investors of the company are restricted from selling their shares.

What are the potential risks of buying IPO stock?

The potential risk of buying IPO stock is losing the invested money due to the downtrend of the company after an IPO.

How can I buy an IPO stock?

You can buy an IPO stock through a registered broker or by filing an online application on ASBA.

What is ASBA?

Application Supported by Blocked Amount (ASBA) is the application through which investors can apply for buying IPO stock. It allows the boney to be blocked in bank till the stocks are allotted.

Is IPO allotted on First Come First Serve basis?

Yes, IPO is allotted on the first come first serve basis.