Why Go Public
So you are thinking of taking your company public! The path to becoming a public company is long and involved, but with proper guidance and information, the process can be less arduous than you might think.
Why Should You Go Public Now?
There are a number of reasons to take your company public. (The process of registering a company's shares of stock with the Securities and Exchange Commission and offering the stock for sale to the public). Going public has both benefits and added responsibilities for your company. Some of the most compelling advantages include:
Access to capital: A public offering of stock can vary from 500,00 to over 1 billion. In 1999, 544 companies completed an IPO(Initial Public Offering). The total capital raised from these offerings was 23.6 billion. By offering stock for sale to the public a company can access a substantial source of corporate funding. If a company needs to raise capital, it can sell stock(equity) or it can it issue bonds(debt securities). An initial equity offering can bring immediate proceeds to a company. These funds may be used for a variety of purposes including; growth and expansion, retiring existing debt, corporate marketing and development, acquisition capital and corporate diversity. Through a public offering founders suffer less dilution when raising capital. Once public, a company's financing alternatives are increased. A publicly traded company can return to the public markets for additional capital via a bond or convertible bond issue or secondary equity offering. A public status can also provide favorable terms for alternative financing from public and private investors. In general, public companies have a higher valuation than private enterprises.
Liquidity: By going public, a company can create a market for its stock. In general, stock in a public company is much more liquid than stock in a private enterprise. Liquidity is created for the investors, institutions, founders, owners and venture capital professionals. Investors of the company may be able to buy or sell the stock more readily upon completion of the public offering. This liquidity can elevate the value of the corporation. The stock's liquidity is contingent on a variety of factors including, registration rights, lock-up restrictions and holding periods. A public company has greater opportunity to sell shares of stock to investors. Ownership of stock in a public company may help the company's principles to eliminate personal guarantees. Liquidity can also provide an investor or company owner an exit strategy, portfolio diversity, and flexibility of asset allocation.
Compensation: Many companies use stock and stock option plans to attract and retain talented employees. It is increasingly common to recruit and compensate executives with a combination of salary and stock. Stock in a public company can be issued as a performance based reward or incentive. This reward could be deemed desirable if the stock has a public market. Stock can be instrumental in attracting and keeping key personnel. Also, certain tax advantages are a consideration when issuing stock to an employee. Generally, capital gains taxes are lower than ordinary income taxes. Owners and employees may have specific restrictions relating to the liquidity and sale of the stock. A public offering can create a market for the company's stock. This market can result in liquidity and reward for the company's employees. A stock plan for employees demonstrates corporate good will allows employees to become partial owners in the company where they work. An allocation of ownership or division of equity can lead to increased productivity, morale and loyalty. This type of compensation is a way of connecting an employee's financial future to the company's success.
Prestige: A public offering of stock can help a company gain prestige by creating a perception of stability. A company's founders, co-founders and managers gain an enormous amount of personal prestige from being associated with a client that goes public. Prestige can be very helpful in recruiting key employees and marketing products and services. When sharing ownership with the public, you spread the company's reputation and increase its business opportunities. By selling stock on an exchange your company can gain additional exposure and become better known. This exposure may lead to improved recognition and business operations. The public status can be leveraged when marketing goods and services. Often a company's suppliers and consumers become shareholders, which may encourage continued or increased business. In this example, a public company could have a competitive advantage over a private enterprise. An IPO can indicate credibility to a company's customers, which may lead to increased sales and a greater corporate profile. Once public, lenders and suppliers may perceive the company as a safer credit risk, enhancing the opportunities for favorable financing terms. Also, a public offering can create publicity that is effective when marketing your company.
Publicity: A public offering of stock can generate prestige, publicity and visibility, which is effective when marketing your company. Public companies are more likely to receive the attention of major newspapers, magazines and periodicals than a private enterprise. The proper use of press releases, interviews or news stories can increase investor awareness, shareholder value and demand for the stock. A strong ad campaign coupled with media initiatives can potentially increase sales and revenue. The publicity received from a public offering encourages new business development and strategic alliances. Analyst reports and daily stock market tables contribute to the awareness of the consumer and financial community. A successful public offering can get your company's story out to the world and open an opportunity for investors that are not suited for an investment in a private company. The publicity that a public offering brings can attract the attention of potential partners or merger candidates. Because the financial condition of a public company is subject to the scrutiny of the SEC reporting requirements, existing or future business relationships are strengthened. Tremendous exposure can be gained from a combination of radio, television, print and IPO publicity.
Mergers and Acquisitions: Once a company is public and the market for its stock is established, the stock can be considered as valuable as cash when acquiring other businesses. A successful IPO can have a dramatic effect on a company's profile, perceived competitiveness and stability. This perception can lead to expanded business relationships and added confidence in the consumer. A valuation of a private company often reflects illiquidity. A successful public offering will increase a company's valuation leading to a variety of opportunities for mergers and acquisitions. With the ability to raise additional capital by returning to the public markets for another offering, a public company is better able to finance a cash acquisition. A public company also has the advantage of using the market's valuation when exchanging stock in an acquisition. SEC disclosure requirements offer merger candidates the assurance of shareholder scrutiny and accurate reporting of the financial condition or solvency of the public company. Using stock to acquire another company can be easier and less expensive than other methods. A public company's corporate strategy is outlined by annual reports and marketing brochures which encourages corporate growth, development and merger activity.
Exit Strategy: One of the important benefits of a public offering is the fact that the company's stock eventually becomes liquid, offering reward and financial freedom for the founders and employees. An IPO also creates a public market for the stock, which provides a potential exit strategy and liquidity to the investors. A psychological sense of financial success can be an added benefit of going public. A public offering can enhance the personal net worth of a company's shareholders. Even if a public company's shareholders do not realize immediate profits, public-traded stock can be used as collateral to secure loans.
Growing companies constantly need access to new capital. Going public is one way to obtain that capital, but it takes time and money -- quite a lot of both! Going public offers some strategic advantages:
Almost all companies go public primarily because they need money. All other reasons are of secondary importance. The typical (firm-commitment) IPO raises $20-40M, but offerings of $100M are not unusual. This can vary widely by industry.
Once public, firms can easily go back to the public markets to raise more cash. Typically, about a third of all IPO issuers return to the public market within 5 years to issue a "seasoned equity offering" (the term secondary is used to denote shares sold by insiders rather than by firms). Those that do return raise about three times as much capital in their seasoned equity offerings as they raised in their IPO.
Although it is a bad signal to investors when an entrepreneur sells his own shares, it still makes sense for many entrepreneurs to cash out some of their equity in order to diversify their holdings or to enjoy life.
Mergers and Acquisition
Many private firms do not appear on the radar screen of potential acquirors. Being public makes it easier for other companies to notice and evaluate the firm for potential synergies.
Public firms tend to have higher profiles than private firms. This is important in industries where success requires customers and suppliers to make long-term commitments. For example, software requires a significant investment in training and and no manager wants to buy software from a firm that may not be around for future upgrades, improvements, bug fixes, etc. Indeed, the suppliers' and customers' perception of company success is often a self-fulfilling prophecy.
Having a public share price makes it easy for firms to give employees a formal stake in the company.
There are also some disadvantages of going public that must be considered:
If the firm is sitting on a highly successful venture, future success (and profit) has to be shared with outsiders. After the typical IPO, about 40% of the company remains with insiders, but this can vary from 1% to 88%, with 20% to 60% being comfortably normal.
Loss of Confidentiality
A major reason why firms resist going public is the loss of confidentiality in company operations and policies. For example, a company could be destroyed if the company were to disclose its technology or profitability to its competitors.
Reporting and Fiduciary Responsibilities
Public companies must continuously file reports with the SEC and the exchange they list on. They must comply with certain state securities laws ("blue sky"), NASD and exchange guidelines. This disclosure costs money and provides information to competitors.
Loss of Control
Outsiders are often in a position to take control of corporate management and might even fire the entrepreneur/company founder. While there are effective anti-takeover measures, investors are not willing to pay a high price for a company in which poor management could not be replaced.
An IPO is a costly undertaking. A typical firm may spend about 15-25% of the money raised on direct expenses. Even more resources are spent indirectly (management time, disruption of business).
Immediate Cash-out Usually Not Permitted
Typically, IPO entrepreneurs face various restrictions that do not permit them to cash out for many months after the IPO.
All IPO participants in the coalition are jointly and severally liable for each others' actions. In practice, this means that they can be sued for various omissions in the IPO prospectus when the public market valuation falls below the IPO offering price. Congress recently passed The Private Securities Litigation Reform Act of 1995. The Act protects disclosure of firm projections, and forces the suing shareholder to have a substantial participation in the firm. Although nothing can eliminate law suits, the Act reduces the likelihood of successful suits and thus influences settlement terms.
Copyright © 2003-2005 GoPublicFAST.com. All rights reserved.