Why Go Public?
Going public is about bringing in broader ownership in your company. When you are
a private company, it limits your expansion ability and your capital raising ability.
This can be overcome by going public. Basically, you come out with an IPO and then
list the shares. That is what going public is about!
Some Key Merits of Going Public
A public listed company has a greater visibility. This includes visibility among
shareholders, among analysts and among institutional and retail shareholders. Going
public also means that company managements get an additional currency in the form
of shares to fund their future plans. This currency can be adequately leveraged
to raise further equity through private placements, rights issues or even to go
for organic and inorganic acquisitions in their area of business. Going public overcomes
a lot of shortcomings of a private company.
5 Ways in which going public adds value to the company
Going public via an IPO helps the company increase its available cash resources
and liquidity position of the business. The promise of increased liquid assets is
important because a lot of working capital problems that you faced as a private
company will no longer be there. When companies sell stocks, their funds available
increase substantially. The money received from these transactions enables companies
to further invest the monies in expansion and diversification. The company is effectively
able to buy growth with the help of funds. Some of core reasons for going public
include increasing working capital, investing in company infrastructure, developing
research initiatives, retiring high cost debt or expanding the business.
Going public offers better credibility to the management and to the company and
also enhances brand strength of the company. It therefore enhances a company’s prestige
and reputation within the industry and also in the capital markets. For example,
a South India based company finding it easier to expand into a national market across
India due to its increased visibility via the public issue. When companies go public,
there is a huge publicity element to it which comes free with the act of going public.
Enhances market cap
By going public, the company is able to enhance market value of the company and
also of the stock. A company’s worth is measured not just by its assets and liabilities.
Wealth of a company is also created by entry barriers, brands, exit barriers, marketing
networks etc. All these factors get factored into the market price and so by going
public the company is able to capture these obvious advantages. If the owners of
a publicly traded company decide at any point to sell it, these features will add
overall value to that sale. In fact, public companies that compose Standard & Poor’s
500 are valued at about 17 times their earnings while private companies are typically
bought and sold at less than four to five times cash flow.”
Stock options to employees
How do you attract talent in a competitive market? To get good personnel, you need
to reward them with more than cash. Stocks can be one way of rewarding employees.
High-quality managers and personnel can be difficult to find in any industry, especially
highly technical sectors. Companies looking to attract the best employees and talent
may find that using stocks as incentives can help them stay competitive as an employer.
Companies can offer stock option plans either for attracting talent or as an adjunct
M&A through stock swaps
One of the most important benefits of going public is the benefit of collateral
acquisition. Instead of selling their own business, publicly traded companies may
someday decide to merge with or buy other companies. Stocks are sometimes used as
part of this payment and the method is referred to as a stock swap. This practice
frees up the company’s liquid funds and even promoters are able to pledge and monetize
their shares without selling them.
Visibility in Indian Stock Market
The biggest advantage of going public is the visibility that it gives to a company.
Look at how TCS has become many times more valuable since its listing in 2004. It
is not that TCS required the funds but the very visibility helped to substantially