Initial Public Offering (IPO) - What is an IPO?
An Initial Public Offering or IPO is the event when a private corporation sells shares in the company publicly (it is also known as ‘going public’)
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Companies typically start off privately, with the shares being held by individuals involved directly in the business. When a company begins to grow, they often go public and use an IPO as a means to raise money.
Why go public with an IPO?
For many businesses, making the move to a public company by using an IPO is done with the goal to raise capital. While it is possible for private companies to raise capital via other means, such as loans, private investors, or even being bought out by another company, the main lure of going public is that it offers the largest amount of capital as compared to these other options.
While large sums might be the main reason behind going public, there are a few other reasons that a company may choose to do so:
- ‘Going public’ can quite literally raise public awareness of the company, boosting its reputation and image and contributing to growth.
- An IPO not only helps secure funds just after going public, but also provides the promise of future funds through secondary offerings.
- It becomes easier to find and hire talented employees. Publicly traded companies often offer stock options. This is appealing because public stock is easily traded.
- Mergers and acquisitions (M&A) also potentially become easier as stock in the company can play a central role.
- One of the owners/founders/private investors wishes to resign their role or retire and so will sell their shares as part of an exit strategy.
Conducting an IPO is generally an event that receives wide coverage and is accompanied by a considerable bit of fanfare. It’s considered an accomplishment to be celebrated, and is often the goal of a business starting out.
The downsides of an IPO
Although there are some clear positives to going public, there are also downsides that might cause a company to take time to consider whether it is the right choice. The disadvantages of an IPO that might dissuade a company include:
- That their financial details and other information about the business is also made public. This is available to all, including competitors.
- An unsteady market price can become a distraction for management.
- Going public is not free, and although generates capital, it can be costly due to associated accounting, legal, and marketing costs.
- It is not guaranteed the the market will accept the pricing of stock in the company. This could mean that the stock price actually falls after the company goes public.
- New shareholders could cause a bit of disruption in the control of the business through voting rights and a board of directors.
- Going public means the company is more vulnerable to legal actions (from shareholders or class action lawsuits, for example).
Should an IPO be the goal of a company
Depending on the market in which you’d consider going public with a company, there are a series of requirements that must be met. For example, in the UK, this would concern the Financial Conduct Authority (FCA) and the London Stock Exchange. Applications would need to be made to both.
For many startups, the ultimate goal may be to go public at some point in the future. The accomplishment comes with prestige and publicity. However, other companies may choose to remain private, due to one or several of the reasons mentioned above.
Whether an IPO is the goal for your company is a largely personal (or rather personal to your particular company). It can involve the current and forecast capital that is available, the market conditions, and the risk that you’re willing to incur, among many others.
A company should take time to go through all possible advantages and disadvantages. This process is usually done with the involvement of an investment bank during the underwriting process. Timing is an important part of going public, so the decision can change in the future (yes, a publicly-traded company can later decide to ‘go private’ if they no longer see benefit in being public).