Going public initial public offering
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Initial public offerings (IPOs) allow privately-owned companies to sell shares to the public and become publicly traded. The process involves hiring lawyers and investment banks, drafting prospectuses detailing the company's history and finances, setting the IPO price, and conducting roadshows to drum up interest from investors. While IPOs provide funding and prestige, they also bring increased regulatory requirements and less control for founders. The decision to go public involves weighing these advantages and disadvantages.
![bar withdrawing money for a decade or more. “So, when you finance yourself with private
equity, investors cannot sell their stake very easily,” Goldstein says.
Many people and institutions with cash to invest are put off by this illiquidity, meaning that PE
firms cannot match the capital-raising power of the public markets. PE funds are also very
opaque, and many investors prefer the transparency offered by public corporations that have
extensive disclosure requirements, Goldstein notes. While executives at public companies do
chafe at the rules, even they benefit from them, Goldstein adds, because the markets provide lots
of feedback to guide management. “I think one of the key advantages of public markets is that
they gather information from many different people in the economy, and this can provide key
information for decision makers,” he says.
“Sometimes, the managers can learn from the stock price,” Edmans adds. The shares’ rise and
fall, for instance, can provide insight into whether the firm should invest in growth or hunker
down.
Some experts also question whether shareholder activism is the crushing burden Davis and
others claim it is. While hedge funds and some big pension funds have stepped up pressure on
companies they invest in, the mutual fund industry has not followed suit, Skeel says. Passively
managed funds — index-style mutual funds and exchange-traded funds — simply buy and hold
shares of firms in the indexes they track, and do not typically use their voting power to pressure
management, Skeel notes. In fact, the funds cannot even vote with their feet, as they must own
the stocks in their benchmark index. Actively managed funds, though they do try to pick
winners, are less likely to pressure management than to simply sell their holdings if they think a
company is poorly run or underperforming.
For funds, which now compete by offering ever-lower fees, “one way to keep your costs down is
not to engage in proxy fights,” Skeel says.
Another benefit of public ownership: A firm has more owners than if it were private. While a
private equity firm may own a controlling stake in a company in which it has invested, this is not
common with public companies. Hence, public ownership can muffle the cries of a minority of
unhappy shareholders, making life easier for managers rather than harder. “These other [forms of
ownership] don’t offer the dispersal [of ownership] you get” as a public firm, says Wharton
finance professor Jessica Wachter.
Is there, then, nothing to worry about as the number of listed companies’ declines?
Wachter says that a decline in public corporations could produce unwelcome results. If the list of
public corporations becomes less diversified as a result of being smaller, stock returns could
become more volatile, she points out. “We don’t know for sure if it’s happening, or what the
effect will be, but it’s possible that the result could be negative,” she adds. That could be harmful
to investors, including those millions with retirement money in 401(k)s.
On the other hand, the decline in public-company listings may be just a passing phase — a
“trend” that could reverse if Washington eases regulatory burdens, the economy picks up and the](https://image.slidesharecdn.com/goingpublic-initialpublicoffering-130923073319-phpapp01/85/Going-public-initial-public-offering-12-320.jpg)
Going public initial public offering
- 1. Going Public - Initial Public Offering Definition of 'Public Company' A company that has issued securities through an initial public offering (IPO) and is traded on at least one stock exchange or in the over the counter market. Although a small percentage of shares may be initially "floated" to the public, the act of becoming a public company allows the market to determine the value of the entire company through daily trading. Public companies have inherent advantages over private companies, including the ability to sell future equity stakes and increased access to the debt markets. With these advantages, however, comes increased regulatory scrutiny and less control for majority owners and company founders. Investopedia explains 'Public Company' Once a company goes public, it has to answer to its shareholders. For example, certain corporate structure changes and amendments must be brought up for shareholder vote. Shareholders can also vote with their dollars by bidding up the company to a premium valuation or selling it to a level below its intrinsic value. Public companies must meet stringent reporting requirements set out by the Securities and Exchange Commission (SEC), including the public disclosure of financial statements and annual 10-k reports discussing the state of the company. Each stock exchange also has specific financial and reporting guidelines that govern whether a stock is allowed to be listed for trading. The Ins and Outs of IPOs What it is: "Going public" is the traditional endgame for most emerging companies. It is about lining up an investment bank as an underwriter and joining the likes of Apple and Google as a public company with stocks traded under a ticker symbol in a market. The Nasdaq Capital Market remains a popular choice for smaller, less-capitalized companies, called small caps. How it works: The months-long process starts with retaining a law firm to engage in the tedious process of assembling the detailed public disclosures needed in the Initial Public Offering prospectus that is included in the Securities Exchange Commission Form S-1. Then there's the interviewing and selecting of an investment bank or group of investment banks that will handle the underwriting, which involves setting the price and lining up the large institutional investors needed for a successful Wall Street rollout. The bank assumes the risk of
- 2. selling the company’s shares in return for a percent of the proceeds called a spread. In the weeks leading up the IPO, company executives and the underwriter engage in a "road show" to meet with analysts, stock portfolio managers and mutual fund managers in several large cities to drum up interest in the stock and gauge public interest. Then it’s show time. Related: The Basics of IPOs Upside: There can be immense advantages to going public, as long as the business fits the profile of a successful public company. That means an annual growth rate of 20 percent and the potential to bring in hundreds of millions of dollars in revenue a year. Public companies can use secondary stock offerings to raise money without having to borrow. It is easier to secure funding and loans from private sources. Stock awards can be used to attract and retain key employees. And there is the prestige and high profile that comes from being a publicly traded company. Going public can also provide a major payday for entrepreneurs, venture capitalists and other business partners after years of effort to build a successful venture. Downside: An IPO involves a huge time commitment that can potentially distract business owners from other strategic priorities. Going public is also pricey. The Small Business Administration (SBA) says the fees and expenses of going public can reach into the six or seven figures. U.S. investment banks managed to charge a 7 percent spread on IPOs in the past decade, about 3 percentage points higher than their European counterparts, according to researchers at Oxford University. Expenses and time commitment will also be ongoing once the company hits the markets, thanks to the plethora of SEC regulations governing public companies. IPOs took a major hit after the late 1990s tech bubble and the 2002 Sarbanes-Oxley Act accounting reforms, which made it more cost prohibitive for small companies to operate as public entities. It is little wonder that fewer than 1,000 businesses a year are successful at IPOs, according to the SBA. Emerging companies have instead turned to other strategies to cash out investors, such as trying to get acquired. Read more: http://www.entrepreneur.com/article/52826#ixzz2fiNZzsQt Indian companies garner Rs 6,000 cr through IPOs in 2012-13
- 3. PTI TOPICS economy, business and finance , company information, economy (general) Indian companies mopped-up over Rs 6,000 crore during fiscal 2012-13 through initial public offerings (IPOs), a marginal rise of four per cent from the past year. A total of ten companies collectively managed to garner Rs 6,059 crore through their IPOs during the fiscal year ended March 31, 2013, shows an analysis of data available with the stock exchanges. This marks a slight increase of four per cent from the total funds raised through IPOs during the
- 4. previous fiscal, 2011-12, when 33 companies had together mopped-up Rs 5,808 crore. In 2010-11, a total of Rs 33,183 crore worth capital was raised by 52 firms through their IPOs. Most of the IPOs that hit the capital market in the current fiscal were smaller in size (less than Rs 1,000 crore) and some companies even withdrew their offers after poor response. Besides, many companies did not launch their offers after doing all the groundwork and obtaining the necessary approvals. Bharti Infratel, the tower arm of telecom giant Bharti Airtel, came out with the largest public issue of the year when it hit the capital market to raise Rs 4,118 crore. This was also the biggest IPO since October 2010, when state-run Coal India had garnered Rs 15,475 crore. Interestingly, there were three jewellery firms — PC Jewellers, Tribhovandas Bhimji Zaveri and Tara Jewels — that entered the capital market this fiscal. Three firms — retailer Sai Silk, packaging firm Plastene India Ltd and component supplier to automotive industry Samvardhana Motherson Finance Ltd — withdrew their offers, collectively worth Rs 1,832 crore, due to poor response. Among the major IPOs of the year, PC Jewellers raked in Rs 609 crore and rating agency CARE garnered Rs 504 crore. Housing finance company Repco Home Finance was the sole state-owned firm to enter the capital market through IPO route during 2012-13. Repco Home Finance raised about Rs 270 crore through its public offer. Other IPOs included Tribhovandas Bhimji Zaveri Ltd (Rs 200 crore), Tara Jewels (Rs 170 crore), VKS Projects (Rs 55 crore), MT Educare (Rs 35 crore), Speciality Restaurants Ltd (Rs 176 crore rpt 176 crore) and V-Mart Retail (Rs 26.25 crore). Most of these companies plan to use the proceeds for expansion work and other general corporate purposes. Keywords: initial public offerings, Indian companies, capital market, 2012-13 IPOs Current IPO's in India Initial Public Offer (IPO), is the first sale of shares by the privately owned company to the public. The companies going public raises funds through IPO's for working capital, debt repayment, acquisitions, and a host of other uses. Investor can apply for IPO Stocks by filling an IPO Application Form. These forms are usually available with stock brokers for free. Investor can also apply for IPO Stocks online through Online Stock Brokers like ICICI bank, Share Khan, and Reliance Money.
- 5. Chittorgarh.com, India's No. 1 IPO investment portal provide recent IPO information from primary stock market. IPO Tools available on this website includes IPO Allotment Status, IPO Bidding Information, IPO Ratings, IPO Grading, IPO Reviews, Grey Market Premiums of IPO's, IPO News and IPO Performance Tracker. Search IPO / FPO: Enter first few letters to get company name ... List of Upcoming IPO's, Current IPO's and Recently Closed IPO's in India Issuer Company Issue Open Issue Close Offer Price (Rs.) Issue Type Issue Size (Crore Rs.) Tiger Logistics (India) Ltd IPO Aug 27, 2013 Aug 29, 2013 66/- IPO-FP 7.52 Ace Tours Worldwide Ltd IPO Sep 09, 2013 Sep 12, 2013 16/- IPO-FP 8.00 Kushal Tradelink Ltd IPO Aug 14, 2013 Aug 21, 2013 35/- IPO-FP 27.75 VKJ Infradevelopers Ltd IPO Aug 12, 2013 Aug 16, 2013 25/- IPO-FP 12.75 Silverpoint Infratech Ltd IPO Aug 12, 2013 Aug 14, 2013 15/- IPO-FP 12.00 GCM Commodity & Derivatives Ltd IPO Aug 01, 2013 Aug 05, 2013 20/- IPO-FP 7.02 Alacrity Securities Ltd IPO Jul 29, 2013 Aug 01, 2013 15/- IPO-FP 9.00 Money Masters Leasing & Finance Ltd IPO Jul 23, 2013 Jul 26, 2013 15/- IPO-FP 2.00 Edynamics Solutions Ltd IPO Jun 10, 2013 Jun 12, 2013 25/- IPO-FP 15.60 India Finsec Limited IPO May 24, 2013 May 28, 201310/- IPO-FP 6.00 Onesource Techmedia Ltd IPO May 17, 2013 May 21, 201314/- IPO-FP 2.80 Just Dial Ltd IPO May 20, 2013 May 22, 2013470/- to 543/- IPO-BB 822.38 - 950.11 Scotts Garments Ltd IPO Apr 25, 2013 May 03, 2013118/- to 120/- IPO-BB Samruddhi Realty Ltd IPO Mar 28, 2013 Apr 03, 2013 12/- IPO-FP 2.60 Ashapura Intimates Fashion Ltd IPO Mar 28, 2013 Apr 04, 2013 40/- IPO-FP 21.00 Opal Luxury Time Products Ltd IPO Mar 25, 2013 Mar 28, 2013 130/- to 135/- IPO-BB 13.00 Lakhotia Polyesters (India) Ltd IPO Mar 19, 2013 Mar 21, 2013 35/- IPO-FP 5.08 GCM Securities Ltd IPO Mar 18, 2013 Mar 20, 2013 20/- IPO-FP 12.18 Bothra Metals and Alloys Ltd IPO Mar 12, 2013 Mar 14, 2013 25/- IPO-FP 12.21 Repco Home Finance Ltd IPO Mar 13, 2013 Mar 15, 2013 165/- to 172/- IPO-BB 270.39
- 6. The Basics of IPOs Thinking about launching an initial public offering for your company? Get oriented The dotcom bust of 2000 put an end to the dreams of many an entrepreneur who had hoped their company's preferred exit strategy would be an initial public offering (IPO) of common stock in the NASDAQ or OTC market. In fact, many business owners at the time had begun to think of IPOs as somewhat automatic in the third or fourth year after launching a business. When the internet stock craze ended, however, so did the hopes of many business owners. These days, fortunately, to the benefit of entrepreneurs nationwide, there's renewed interest in IPOs: Entrepreneurs, venture capitalists and angel investors are once again openly discussing the IPO as a realistic benchmark. If you're even considering the possibility of an initial public offering for your company, the following review of the natural order of IPOs will help you understand what to expect before you start the process. The start-to-finish inner workings of a typical IPO happen like this: The company begins the process by retaining a law firm to assist in producing a detailed firm disclosure. This will be the main content for the IPO prospectus, which must be filed with the SEC prior to going public with the stock on the exchange. The prospectus reports on and summarizes every aspect of the company's operating life from the day it opened up for business until the date of the IPO. Every contract, every lease, all partnership agreements and employment deals, each marketing and sales relationship, and every financial statement-these are all disclosed in a chronological format that outlines the life and development of the company over the course of time. The rationale is to provide outside investors with a comprehensive due diligence on all the potential risks associated with investing in the company. This disclosure will also include any pending legal matters involving the company, as well as the business's interaction with various government agencies, from building code regulations all the way to IRS tax issues (if there are any). It's important to note that researching and writing the prospectus is a tedious task that requires specific expertise in order to meet all the filing requirements of the SEC. Next, while the prospectus preparation is in process, the company will interview various investment banks and then select one (or more) to handle the underwriting of the IPO. Sometimes, the IPO is handled by one investment bank. Other IPO's involve a "lead underwriter" heading up a consortium of two to three banks. Whatever the number, the two primary functions of the investment bank(s) are to help the company set the offering price of the stock, and then disseminate the shares among a wide range of investors in the public capital market.
- 7. By definition, underwriting involves the investment bank accepting the full risk of selling the business's shares, such that the bank actually agrees to purchase all the offered shares from the issuing company at the agreed upon offering price. It's then the bank's risk (and responsibility) to sell the shares to investors in the market. In exchange for taking this "risk of selling" off the shoulders of the issuing company, the underwriter charges a spread to the company, which is deducted from the total funds raised and retained by the bank. The issuing company receives the "net proceeds" (the difference between the total IPO offer value minus the spread). As an example, let's say a company is selling 5 million shares at $10 each for a $50 million total IPO value. If the underwriter and the company agree on a 4 percent spread, the bank keeps $2 million-4 percent of $50 million-and then transfers $48 million in net proceeds to the company on the day of the IPO. The issuing company doesn't have to wait and see how the market responds to the offering of its stock, as the bank has underwritten that risk and paid the company on the front end. However, the investment bank is now in charge of actually selling the shares to the public, and can actually offer the shares at a price higher than the prospectus offering price at the opening of the market's trading. From our prior example, then, the underwriter could post the opening "asking" price on the NASDAQ at $10.50 and write orders from buyers for 2 million shares, then raise the asking price, or "ask," to $10.75 or $11 and sell another 2 million shares. By the afternoon of the IPO date, the asking price could be at $11.25 or $11.50 and the underwriter would have ended up selling the 5 million shares at an average price of around $11, bringing in $55 million. So the bank would have realized an additional $5 million beyond the $50 million outlined in the prospectus, leaving the investment bank happy with the IPO, having made $7 million in total profit. But the issuing company could be upset that the bank didn't advise an offer price of $11 (or $10.50, or anything over $10), which would have increased the net proceeds to the company. The underwriter, however, accepts the risk of the IPO, with the understanding that the shares could have been offered at 10 and then could have dropped to $9.75 or $9.50 in the market, based on a lower-than-expected demand. In this case, the firm still has $48 million in net proceeds, but the bank has less than $2 million in fees (if the IPO sells out at less than the $50 million targeted in the prospectus). Now let's get back to the next steps. Prior to the IPO date, the company and the underwriter typically head out to do a "road show," meeting with mutual fund managers, analysts and other stock portfolio managers in several large cities during the weeks leading up to the IPO date. These presentations are designed to generate dialogue between the potential stock buyers and the senior management of the issuing company, so they can discuss sales, marketing, the competition, operations, pending
- 8. new products or services, and financial performance. The underwriter uses these road shows to gauge the level of interest in the company among potential buyers, and to determine the likely IPO price that investors would pay for the shares. Please note that the IPO cannot be pre-sold during this time-no actual orders can be taken in advance of the IPO date. During the road show, the lead investment bank will recruit a selling syndicate-an assembly of other brokerage firms that have expressed interest in helping disseminate the stock nationwide on the IPO date. This group will each buy large blocks of stock- 10,000 shares or more-and then spread it out through their branch network of offices to various fund managers and other investors. On the IPO date, the company and its team-the lawyers who compiled the prospectus and the investment bank(s) who'll handle the offering-do their last-minute edits and negotiate the final offer price, and the last version of the prospectus is filed with the SEC, usually within the half hour prior to the opening of trading on the exchange. Once the SEC gives its "OK" that the prospectus meets the minimum filing requirements-the SEC does not rule on the accuracy or the adequacy of the firm's prospectus-the investment bank opens up trading at its chosen asking price, and the selling begins. Raising significant outside equity capital through an IPO is a major milestone in the life of a company. But with the right amount of preparation-and knowing what to expect-the prospects for doing a successful IPO can be great. David Newton is a professor of entrepreneurial finance and head of the entrepreneurship program, which he founded in 1990, at Westmont College in Santa Barbara, California. The author of four books on both entrepreneurship and finance investments, David was formerly a contributing editor on growth capital for Industry Week Growing Companies magazine and has contributed to such publications as Entrepreneur, Your Money, Success, Red Herring, Business Week, Inc. and Solutions. He's also consulted to nearly 100 emerging, fast-growth entrepreneurial ventures since 1984. Read more: http://www.entrepreneur.com/article/76462#ixzz2fiTMQroA India's Biggest Public Companies by Forbes India There are 61 companies on this list, screened on four metrics' sales, profits, assets and market value. Reliance Industries comes out on top
- 10. Public Limited Company A public limited company is a voluntary association of members which is incorporated and, therefore has a separate legal existence and the liability of whose members is limited. Its main features are :- The company has a separate legal existence apart from its members who compose it. Its formation, working and its winding up, in fact, all its activities are strictly governed by laws, rules and regulations. The Indian Companies Act, 1956 contains the provisions regarding the legal formalities for setting up of a public limited company. Registrars of Companies (ROC) appointed under the Companies Act covering the various States and Union Territories are vested with the primary duty of registering companies floated in the respective states and the Union Territories. A company must have a minimum of seven members but there is no limit as regards the maximum number. The company collects its capital by the sale of its shares and those who buy the shares are called the members. The amount so collected is called the share capital. The shares of a company are freely transferable and that too without the prior consent of other shareholders or without subsequent notice to the company. The liability of a member of a company is limited to the face value of the shares he owns. Once he has paid the whole of the face value, he has no obligation to contribute anything to pay off the creditors of the company. The shareholders of a company do not have the right to participate in the day-to-day management of the business of a company. This ensures separation of ownership from
- 11. management. The power of decision making in a company is vested in the Board of Directors, and all policy decisions are taken at the Board level by the majority rule. This ensures a unity of direction in management. As a company is an independent legal person, its existence is not affected by the death, retirement or insolvency of any of its shareholders. Advantages Continuity of existence Larger amount of capital Unity of direction Efficient management Limited liability Disadvantages Scope for promotional frauds Undemocratic control Scope for directors for personal profit Subjected to strict regulations The Perks of Going Public Academic research has shown that in recent years, young firms have tended to wait longer to go public than in the past, Geczy says. But many firms, including Facebook, do go public eventually. Facebook had no other way to raise the funds it needed to continue growing, and the public markets do offer benefits that alternatives like private equity cannot match, Geczy points out. Federal rules, for example, prohibit most small investors and mutual funds from investing in PE firms. Many investors that can put money into PE don’t do so because of fund rules that typically
- 12. bar withdrawing money for a decade or more. “So, when you finance yourself with private equity, investors cannot sell their stake very easily,” Goldstein says. Many people and institutions with cash to invest are put off by this illiquidity, meaning that PE firms cannot match the capital-raising power of the public markets. PE funds are also very opaque, and many investors prefer the transparency offered by public corporations that have extensive disclosure requirements, Goldstein notes. While executives at public companies do chafe at the rules, even they benefit from them, Goldstein adds, because the markets provide lots of feedback to guide management. “I think one of the key advantages of public markets is that they gather information from many different people in the economy, and this can provide key information for decision makers,” he says. “Sometimes, the managers can learn from the stock price,” Edmans adds. The shares’ rise and fall, for instance, can provide insight into whether the firm should invest in growth or hunker down. Some experts also question whether shareholder activism is the crushing burden Davis and others claim it is. While hedge funds and some big pension funds have stepped up pressure on companies they invest in, the mutual fund industry has not followed suit, Skeel says. Passively managed funds — index-style mutual funds and exchange-traded funds — simply buy and hold shares of firms in the indexes they track, and do not typically use their voting power to pressure management, Skeel notes. In fact, the funds cannot even vote with their feet, as they must own the stocks in their benchmark index. Actively managed funds, though they do try to pick winners, are less likely to pressure management than to simply sell their holdings if they think a company is poorly run or underperforming. For funds, which now compete by offering ever-lower fees, “one way to keep your costs down is not to engage in proxy fights,” Skeel says. Another benefit of public ownership: A firm has more owners than if it were private. While a private equity firm may own a controlling stake in a company in which it has invested, this is not common with public companies. Hence, public ownership can muffle the cries of a minority of unhappy shareholders, making life easier for managers rather than harder. “These other [forms of ownership] don’t offer the dispersal [of ownership] you get” as a public firm, says Wharton finance professor Jessica Wachter. Is there, then, nothing to worry about as the number of listed companies’ declines? Wachter says that a decline in public corporations could produce unwelcome results. If the list of public corporations becomes less diversified as a result of being smaller, stock returns could become more volatile, she points out. “We don’t know for sure if it’s happening, or what the effect will be, but it’s possible that the result could be negative,” she adds. That could be harmful to investors, including those millions with retirement money in 401(k)s. On the other hand, the decline in public-company listings may be just a passing phase — a “trend” that could reverse if Washington eases regulatory burdens, the economy picks up and the
- 13. financial markets return to normal. It could be years before the verdict is in. Read more: http://business.time.com/2012/10/12/a-premature-eulogy-for-public- companies/#ixzz2fiP87r1k Going Public . . . refers to a company’s first sale of its securities (usually common stock) to the general population of equity investors. It is accomplished by registering those securities with the federal Securities and Exchange Commission and state securities commissions, preparing a detailed offering circular called a prospectus and then selling the securities to the general public. Public offerings are typically conducted by a team of professional underwriters. Going public is a goal of many companies that seek venture capital. It enables them to raise money from the public, creates a market for subsequent sales of their stock and raises their public profile. It also creates an easily ascertainable market value for shares. Many company entrepreneurs consider going public a business rite of passage that legitimizes their efforts and confirms their success. Many plan long and hard for the opportunity to run a public company. Most who take their companies public, believe that the offering proceeds generated by their offering and other benefits of being a public company are worth the effort and expense required to complete a public offering. But going public is not the right decision for every company and does not insure future success. Seeking funds from private investors or from traditional lending sources may make more sense. At times, going public may be impossible because of market conditions unrelated to a prospective candidate’s strength. Determining whether going public makes sense requires consideration of a number of factors including timing, company history, company prospects for future growth and management’s personality. The advantages and disadvantages of going public should be weighed carefully before a decision is made to seek funds in the public markets. Among the advantages management should consider are: • Lower cost of capital • Capital for continued growth • Increased shareholder liquidity • Future financings • Enhanced ability to expand • Improved company image Lower cost of capital. Going public is often triggered by management’s belief that it can raise more money and get a better price for its stock by selling to the public than to a venture capitalist
- 14. or other private investor. When this is true, a public offering can raise money at less cost and with less dilution of management’s shareholdings. Going public becomes cost effective for most companies when they finally meet the profile required to attract institutional investors to the offering. While these profiles vary according to market conditions and offering company industry, it generally requires sustained growth and profitability over a significant period of time, a company valuation of at least $10 million, and prospects for continued growth at a rate greater than the industry average. When a company matures to the point of meeting this profile, its ability to attract institutional investors often boosts the price of its stock high enough to make going public the most economical way to raise capital. Capital for continued growth. Perhaps the most obvious benefit of going public is the proceeds (cash) of the offering. These moneys can be used for a variety of company purposes as long as they are disclosed in the company’s offering documents. Typical uses are: to increase working capital, to acquire new divisions or technologies, to increase marketing efforts, to pay for research or plant modernization, or to repay debt. Increased shareholder liquidity. Going public makes it easier for company shareholders to sell their shares by creating a public market for the company’s stock. Shareholders who register their shares in the company’s offering hold freely tradable shares once the offering is completed. Even the shares that are not registered in the offering become more liquid. Because of the offering and the periodic reporting requirements it imposes on the company, they often qualify after a prescribed period of time to sell limited numbers of their shares under Rule 144. If they want to sell more shares than Rule 144 permits, they can benefit from easier and less expensive methods available for registering their shares that are available to public companies. See: Restricted Securities. Future financings. Most public offerings raise a significant amount of equity capital and thus dramatically improve the company’s net worth and debt-to-equity ratio. This, in turn, makes it easier for a company to borrow money from commercial lenders at competitive interest rates. Also, an existing public market for the company’s stock makes it easier for the company to sell additional equity. If the company’s stock does well (that is, increases in price), the company can offer for sale additional shares of stock or a new class of stock. Enhanced ability to expand. The market created by going public makes it easier for a company to expand through acquisitions and mergers. Because registered shares can be converted into cash, a public company can often use its stock instead of cash to acquire a company or other valuable property. With the proper deal structure, the use of shares instead of cash can ease the immediate tax burden of the seller caused by the sale of his company and, thereby, make the acquisition easier and less expensive to close. Liquid stock also increases the value of a company’s stock and option plans, making it easier for a company to attract and retain the key employees it needs to help it grow. Improved company image. Going public, with all the financial disclosure and investor relations planning it requires, usually attracts the attention of the business and financial press. Free
- 15. publicity, coupled with the perception that going public is a significant milestone of success, enhances a company’s image. This improved image can make it easier for management to deal with suppliers and customers. Many privately held companies that compete with public ones find their customers and suppliers reluctant to deal with them on equal terms because of their lack of operating history and the confidentiality of their financial data. Going public can erase this distinction and make it possible for the company to compete more effectively. The advantages of going public can be substantial, but they can be outweighed by the disadvantages. It depends on management’s goals and the circumstances of the company. Among the disadvantages that should always be considered are: • Expense • Loss of confidentiality • Periodic reporting • Reduced control • Shareholder pressure • Restrictions on stock sales Expense. Going public is expensive. The underwriter’s discounts alone can amount to as much as 6 to 10 percent of the total proceeds of the offering. (In a $10 million offering, this can be as much as $1 million.) Other expenses, which include the underwriter’s out-of-pocket expenses (typically not included in the underwriter’s discount), filing fees, transfer agent fee, legal fees, printing fees, and accounting fees can add another $200,000 to $500,000 to a company’s cost of going public. Most of these expenses must be paid at the closing of the offering. Going public also subjects a company to annual and quarterly financial reporting requirements imposed by the Securities and Exchange Commission. Complying with these requirements increases the company’s costs of doing business. Time and money are required to generate the information necessary for these reports. Loss of confidentiality. Going public forces a company to prepare and distribute to potential investors a complete description of the company, its history, its strengths, its weaknesses, and its future plans. Detailed disclosures of financial information are required. Information about the shareholdings and compensation arrangements of management and holders of large blocks is made public. All of this information must be updated and supplemented in reports required by the Securities and Exchange Commission. Once information is filed, it becomes readily available to competitors, employees, customers, suppliers, union organizers and others. Periodic reporting. Going public subjects a company to a number of periodic reporting requirements with the Securities and Exchange Commission. These requirements include annual and quarterly financial reports (on forms 10-K and 10-Q) as well as prompt reporting of material events that affect the company (on form 8-K). For most companies, these and other reporting requirements, which force the company to maintain audited financial statements, increase the
- 16. company’s cost of doing business by imposing more stringent accounting practices and by making additional demands on management’s time. Reduced control. A public offering can reduce management’s control over a company if outsiders obtain enough stock to elect a majority of the company’s board of directors. Whenever this is true, outside shareholders can remove members of the management team. (This is not a risk inherent only in public offerings, however. Any sale of voting stock to raise money reduces the percentage ownership of management. Sales of a majority of the company’s voting stock to a few private investors, in fact, may make management’s ability to retain control less certain than a public offering, which distributes those same shares to a greater number of investors. The larger number of shareholders in a publicly held company can make concerted action by the outsiders more difficult.) Public companies are more susceptible to unfriendly takeover because their shares are easy to accumulate. Shareholder pressures. Even managements that retain voting control over their companies find that going public subjects them to pressures that can affect the way they run their businesses. Many entrepreneurs find that shareholder expectations and the quarterly reporting requirements of the Securities and Exchange Commission combine to create significant pressures on a company to continually improve its performance on a quarter by quarter basis. Failure to meet these shareholder expectations can cause the market value of the company’s stock to decline, making it more expensive for the company to raise money or acquire other companies using its stock. This pressure to meet short-term goals can tempt management to forgo necessary long- term planning when it includes present-day sacrifices that will be reflected in the company’s quarterly reports. Restrictions on stock sales. Only those shares registered and sold in the offering become freely tradable. Unregistered shares remain subject to the same trading restrictions as they were before the offering. Moreover, the Securities and Exchange Commission imposes additional restrictions on the ability of major shareholders and company insiders to sell company stock. The factors that should be considered when contemplating a first public offering are numerous and complex: This discussion does not cover them all. Entrepreneurs should consult with their accountants, attorneys, investment bankers, and other advisers before taking their companies public. See: Control, Investment Bankers, IPOs (Initial Public Offerings), Penny Stock, Private Placements, Public Offering, Restricted Securities, Unit Offerings. Collected By : Raghunathan Janarthanan Contact: raghunathan.contact@gmail.com