Going public and offering stock in an initial public offering represents a milestone for most privately owned companies.
A large number of reasons exist for a company to decide to go public, such as obtaining financing outside of the banking system or reducing debt.
Furthermore, taking a company public reduces the overall cost of capital and gives the company a more solid standing when negotiating interest rates with banks. This would reduce interest costs on existing debt the company might have.
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.
One of the biggest advantages for a company to have its shares publicly traded is having their stock listed on a stock exchange.
Advantages for a Company Having Listed Stock
In addition to the prestige a company gets when their stock is listed on a stock exchange, other advantages for the company include:
- Being able to raise additional funds through the issuance of more stock
- Companies can offer securities in the acquisition of other companies
- Stock and stock options programs can be offered to potential employees, making the company attractive to top talent
- Companies have additional leverage when obtaining loans from financial institutions
- 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
- 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 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 Considerations for a Company Going Public
Offering shares to the public has other advantages for companies, besides the prestige of having their stock publicly traded on a stock exchange.
Before the Internet boom, most publicly traded companies had to have proven track records and have a history of profitability.
Unfortunately, many Internet startups began having IPOs without any semblance of earnings and without any plans on being profitable. These startups were funded with venture capital and would often end up spending all the money raised through the IPO, making the original owners rich in the process and leaving the small investors holding the bag when the shares became worthless.
This technique – of offering shares without creating value for stockholders – is commonly known as an “exit strategy”, and was used repeatedly during the Internet boom causing the dot.com bubble to burst and bringing down the market for IPOs in the early 2000s.
Nevertheless, some companies choose to remain private, avoiding the increased scrutiny and other disadvantages having publicly traded stock entails. Some very large companies, such as Domino’s Pizza and IKEA remain privately held.