The advantages and disadvantages of a company going public
A lot of the business news headlines these days are about upcoming initial public offerings (IPOs) or popular companies looking to go public. The year 2020 saw a bumper IPO season, with big names like SBI Cards and Burger King going public. Then there were some others like Happiest Technologies, Route Mobile and Mazagon Dock, the news of whose listing generated a lot of buzz.
In an initial public offering, a company goes public. This means the shares of a previously unlisted or private company are listed for trading on the exchanges. It is a common fundraising method among smaller companies or startups that may be looking to grow their businesses. With an IPO, a company can widen its pool of investors and raise funds.
However, as in the case of most things, there are obviously a number of advantages and disadvantages of a company going public. Not everything about an IPO is rosy. There are some cons along with the obvious pros of filing for an IPO.
Let's start with the advantages
As stated earlier, many companies choose the IPO route to raise fresh capital to expand existing business operations. Some others use the funds raised via an IPO to meet operational costs or clear existing debt, or to finance research and development.
In the IPO filing process, one of the steps is a 'roadshow', a stage when the company going public (the issuer) conducts a promotion of the listing to generate wider interest. In this marketing stage, they also bring to the notice of people their product and create awareness about the same. Thus, an IPO is often a good way for a growing company to catch the attention of a larger audience.
There are some cases where the early investors of a company use an IPO as an exit from the company. They try to reap the profits generated from companies they helped setup that eventually went on to become a success.
From the point of view of investors, going public enhances their liquidity since now the shares of the company can be traded or sold in a public market.
Coming to the disadvantages
There are several rules and regulations surrounding listed companies and market trading. When a company goes public, it gets listed on the exchanges where its shares can be traded openly. Such companies are required to adhere to regulatory standards and strict disclosure norms. Thus, going public comes with additional compliance burden. Regulatory bodies want companies to ensure timely and accurate disclosure to safeguard the interests of the investors. Such a compliance burden also comes with added costs, a factor that is a huge red flag for smaller companies. The company's every move and finances are under the radar once they become public entities.
Additionally, the IPO process in itself is a not-so-cheap affair. It involves legal, accounting and registration fees, in addition to the charges levied by the merchant bankers hired for the purpose. There are also the costs involved in the promotion of the listing that need to be considered, among other things.
Once a company goes public, there is increased pressure on it to perform every quarter, thus leading to higher performance pressure. This is because of the norms surrounding financial reporting where every listed company is required to announce its quarterly results. This in turn leads to more focus on short-term growth and reduced focus on investing in strategies for long-term growth.
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