Why Companies Go Public
“Going public” is what we say when private companies become publicly-traded and quoted on the stock exchange within the countries they operate in. It is a big milestone for most privately owned companies.
“Going public” is what we say when private companies become publicly-traded and quoted on the stock exchange within the countries they operate in. It is a big milestone for most privately owned companies.
Companies decide to go public for varying reasons ranging from the need to obtain financing outside of the banking system, to acquire assets or expand or to even reduce debt.
The main reason companies decide to go public, however, is to raise money - a lot of money - and spread the risk of ownership among a large group of shareholders.
Spreading the risk of ownership is especially important when a company grows, with the original shareholders wanting to cash in some of their profits while still retaining a percentage of the company.
More so, going public reduces the overall cost of capital and places a company in a much better position to negotiate interest rates with banks where necessary which could also reduce interest costs on existing debt the company might have.
Advantages
One of the biggest advantages for a company to have its shares publicly traded is having their stock listed on a Stock Exchange. In addition to the prestige a company gets when their stock is listed on a stock exchange, other advantages for the company include:
1. Being able to raise additional funds through the issuance of more stocks.
2. Companies can offer securities in the acquisition of other companies.
3. Stock and stock options programs can be offered to potential employees, making the company attractive to top talent.
4. Companies have additional leverage when obtaining loans from financial institutions.
5. Market exposure - having a company's stock listed on an exchange could attract the attention of mutual and hedge funds, market makers and institutional traders.
6. Indirect advertising - the filing and registration fee for most major exchanges includes a form of complimentary advertising. The company's stock will be associated with the exchange their stock is traded on.
7. Brand equity - having a listing on a stock exchange also affords the company increased credibility with the public, having the company indirectly endorsed through having their stock traded on the exchange.
Other things to note
Offering shares to the public has other advantages for companies besides the prestige of having their stock publicly traded on a stock exchange.
However, for companies to be quoted, they must have a track record that allows them to be regarded as legit or stable. More so, there's a minimum valuation they're supposed to have.
Startups that do not have this have to be funded with venture capital. One challenge here is that, when things do go well with companies financed like this, the original owners get rich in the process; otherwise, everybody loses everything. There are no structures to protect anyone here.
By investing on companies quoted on the stock exchange, as opposed to investing in private companies, you protect yourself as these companies must follow standards to ensure that they maximize your gains in the company - and a whole lot more.
Written by Lawretta Egba