Going Public

12 Key excerpts on "Going Public"

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  eBook - ePub

  Running a Public Company

  From IPO to SEC Reporting

  • Steven M. Bragg(Author)
  • 2009(Publication Date)
  • Wiley

    (Publisher)

  PART I

  How to Go Public

  Passage contains an image

  CHAPTER 1

  The Initial Public Offering

  Introduction

  The initial public offering (IPO) is considered by many business owners to be the true sign of success—they have grown a business to the point where its revenue volume and profitability are large enough to warrant public ownership. However, the road to an IPO is both expensive and time consuming and requires significant changes to a company. This chapter describes the pluses and minuses of being public, as well as the steps required and costs to be incurred in order to achieve that goal.

  Reasons to Go Public

  Though a management team may not say it, a major reason for Going Public is certainly to create a market for the shares they already own. Though these shares may not be available for sale for some time after the IPO, management will eventually be able to cash in its shares and options, potentially generating considerable profits from doing so. This reason is not publicized to the public, since the public would be less likely to invest if investors think the management team is simply cashing in and then leaving the business.

  A slight variation on the wealth creation theme is that, by having a broad public market for their shares, original shareholders are likely to see a rise in the value of their shares, even if they have no intention of selling the shares. The reason is that there is no longer a penalty for not having a ready market for the shares, which adds a premium to what the shares would have been worth if the company had remained privately held.

  The same logic can be used as a tool for employee retention. A private company can issue options to its employees, but they are worth little to the employees unless there is a market in which they can sell the shares. By Going Public, a company may experience increased employee retention, since they wish to wait until their options vest so they can cash in the resulting shares for a profit.

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  Nanotechnology

  The Business

  • Michael T. Burke(Author)
  • 2018(Publication Date)
  • CRC Press

    (Publisher)

  22 16 Public Offerings: Pitfalls and Benefits Another common means of exiting a company is to offer shares on public stock markets. This can be done either by a direct offering or by merging with or buying another company that has publicly traded stock. This chapter will discuss these two options as well as some variations on public offerings. The emphasis will be on looking at the benefits and pitfalls of not only the process but also the outcome: being a publicly traded company. The entrepreneur’s dream is to form a company and then take it public—in other words, sell shares on a stock market, raising money to fund his com-pany and at the same time becoming relatively wealthy. The truth is that preparing and conducting an initial public offering (IPO) involves a plethora of details and a lot of work traveling and presenting the company to inves-tors. Then, when the company is publicly traded and shareholders have to be satisfied, the entrepreneur finds himself in a new environment, one in which he has nowhere near the control he had pre-IPO. This chapter will discuss the process and outcome of a public offering and will look at alternatives. Why Should a Company “Go Public”? The reason public markets came into existence was to provide a means for businesses with large capital needs to get access to that capital. Ownership portions, or shares, of a company were sold to individuals and organizations with the means to buy them. This meant that the companies offering these shares were no longer owned by one or a small number of people, generally the founders. Now the companies were owned by a very large group of share-holders, and the founders and managers found themselves no longer able to make all important decisions without consultation with or review by others. The senior managers and founders of companies did not lose the ability to make all of the day-to-day and most of the strategic decisions needed to build plants, hire workers, and sell products.

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  The New CFO Financial Leadership Manual

  • Steven M. Bragg(Author)
  • 2010(Publication Date)
  • Wiley

    (Publisher)

  Part Five Publicly Held Company Passage contains an image Chapter 15 Initial Public Offering

  The initial public offering (IPO) is considered by many business owners to be the true sign of success—they have grown a business to the point where its revenue volume and profitability are large enough to warrant public ownership. However, the road to an IPO is both expensive and time consuming and requires significant changes to a company. This chapter describes the pluses and minuses of Going Public, as well as the steps required and costs to be incurred in order to achieve that goal.

  Reasons to Go Public

  Though a management team may not say it, a major reason for Going Public is certainly to create a market for the shares they already own. Although these shares may not be available for sale for some time after the IPO (see the “Restrictions on Stock in a Publicly Traded Company” section), they will eventually be able to cash in their shares and options, potentially generating considerable profits from doing so. This reason is not publicized to the public, since they will be less likely to invest if they think the management team is simply cashing in and then leaving the business.

  A slight variation on the wealth creation theme is that, by having a broad public market for their shares, original shareholders are likely to see a rise in the value of their shares even if they have no intention of selling the shares. The reason is that there is no longer a penalty for not having a ready market for the shares, which adds a premium to what the shares would have been worth if the company had remained privately held.

  The same logic can be used as a tool for employee retention. A private company can issue options to its employees, but they are worth little to the employees unless there is a market in which they can sell the shares. By Going Public, a company may experience increased employee retention, since they wish to wait until their options vest so they can cash in the resulting shares for a profit.

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  Theoretical Foundations of Corporate Finance

  • João Amaro de Matos(Author)
  • 2018(Publication Date)
  • Princeton University Press

    (Publisher)

  PART III Capital Restructuring 6 Going Public A private firm is a firm with no shares being transacted in a public equity market. There are two alternative ways in which a firm such as this may raise additional equity capital. The first is by selling shares to a venture capitalist, maintaining the private nature of the firm. The second is by raising the required additional capital in a public equity market, in which case the firm is said to go public . An initial public offering (IPO) is the first effort by a private firm to go public, by issuing shares. An initial public offering may be the best way to refinance a firm from different points of view. It is possible that some people having considerable wealth invested in the enterprise wish to add liquidity to their investments and also want to diversify their portfolios. To take the company public is a simple way to reach that goal compared to selling shares back to the company. A different view is that raising funds through an IPO instead of being financed by a bank or through venture capitalists may add more value to the firm. In fact, depending on the circumstances, the equity market may be a more efficient mechanism to raise large sums of external capital. The way an IPO is operated involves four main agents. The first is the issuing firm, which is Going Public. In order to sell its shares, this firm needs the help of some institution in the financial market. Such an institution, with a more knowledge of the market and its demands, is better positioned than the issuing firm to price the new issue and becomes responsible for the credibility of the final offering price. This role is played by an investment bank. Once the price is established, the firms need to find intermediaries ( underwriters ) to introduce the shares in the market. Most of the time, the investment bank is also one of the underwriters. The final agents to be considered are the investors in the market who will buy (or not buy) the new issue.

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  IPOs and Equity Offerings

  • Ross Geddes(Author)
  • 2003(Publication Date)
  • Butterworth-Heinemann

    (Publisher)

  1 The decision to go public It is an oft-repeated clich´ e in business that for a company to survive it must grow. It must grow its market share. It must grow its customer base. It must increase its R&D spending in order to find new products or new uses for existing products. It must increase its manufacturing capacity in order to make the products. And then it must market and distribute these products. All of this takes money. And lots of it. One of the most tried and tested methods of raising cash is through an initial public offering. An initial public offering (IPO) is, as it sounds, the first sale of a company’s shares to the public and the listing of the shares on a stock exchange. In the UK, IPOs are often referred to as flotations. Many companies need more cash than provided by an IPO. They return to the stock market in secondary offerings or rights issues. While not as monumental as the first decision to go public, any decision to raise equity is not taken lightly. Issuing companies are not the only parties that raise money on the stock market. Existing shareholders may decide to offload their holding either in the IPO or secondary offering. The existing shareholder may be an individual, venture capital firm, parent company or even a government, in the case of privatizations. Whoever is raising the funds, the process of flotation is arduous, involves significant time commitments from the company’s management and advisors (investment bankers, stockbrokers and solicitors amongst others), and is not cheap. This effort is expended in order to raise the cash required at a price that keeps both the vendor and the purchaser of the shares happy. The three main interested parties in an IPO (the vendor, the company and the investor) have complementary objectives.

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  Investment Banking

  Valuation, LBOs, M&A, and IPOs

  • Joshua Rosenbaum, Joshua Pearl(Authors)
  • 2021(Publication Date)
  • Wiley

    (Publisher)

  PART Four Initial Public Offerings 401 CHAPTER 8 Initial Public Offerings A n initial public offering (IPO) represents the first time a company (“issuer”) sells its stock to public investors. The shares are then traded on an exchange such as the Nasdaq Stock Market (Nasdaq), the New York Stock Exchange (NYSE), the London Stock Exchange (LSE), or the Stock Exchange of Hong Kong (SEHK). Collectively, these primary exchanges comprise what is commonly known as “the stock market”. Each publicly traded company assumes a “ticker symbol”, typically a one-to-four- letter abbreviation that serves as a unique identifier. Once a company “goes public”, its shares will trade daily on the open market where buyers and sellers determine its prevailing equity value in real time. An IPO is a transformational event for a company, its owners, and employees. In many ways, the company and the way it operates will never be the same again. Detailed business and financial information will be made public and subject to analysis. Management will conduct quarterly earnings calls and field questions from sell-side research analysts. They will also speak regularly with existing and potential new investors. New accounting, legal, regulatory, and investor relations infrastructure and employees will need to be brought on board to handle public company requirements. While IPO candidates vary broadly in terms of sector, size, and financial profile, they need to feature performance and growth attributes that public investors would find compelling. Is the company and its addressable market large enough to warrant attention? Is it a market leader? How exciting is the growth opportunity? Is the cycle entry point attractive? How capable is the management team? Market conditions must also be conducive. The number of IPO offerings over a given time period is strongly correlated to the performance of the overall stock market. The better the market, the more plentiful the IPO pipeline.

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  Investor Relations

  Principles and International Best Practices in Financial Communications

  • Anne Guimard(Author)
  • 2015(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Those who consider that living happily means living secretly should think twice before they decide to get listed, and wait until they come to believe that being thrust into the spotlight can in fact help them grow faster than competition. In addition, Going Public is an extremely strenuous exercise for these companies, one that can slow or even stop growth. In some cases, it may make sense, and be much wiser, to postpone the listing decision. 1.1   Why Go Public? Companies may turn to capital markets at a given point in time in their history to fund their expansion, build their corporate reputation, or enable existing shareholders to sell their shares at the best possible price. While this book is not intended as a complete guide to initial public offerings (IPO), it aims at focusing on the mission-critical role of Investor Relations throughout the process and well beyond (see Figure 1.1). Providing it offers and maintains a consistently clear understanding of its activities and strategies (microeconomic factors) along with updates on the environment in which it is operating (macroeconomic picture) on a regular basis, the company will be able to achieve the following: • Raise capital on the financial markets to help fund its development. Capital can be raised through debt (if the company issues bonds) or equity (if shares are issued). These two types of security can also be combined into hybrid instruments. The company’s Investor Relations program will relate to all of the securities issued since they are designed to reflect not only its overall image, but also to promote a specific category of securities. Equity can be a less expensive source of funding than bonds, but can be counterproductive if new issues dilute earnings per share. Different factors, such as financing costs and balance sheet structures, can prompt companies to issue other types of securities (bonds or hybrid instruments)

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  Stock Options For Dummies

  • Alan R. Simon(Author)
  • 2010(Publication Date)
  • For Dummies

    (Publisher)

  Instead of a limited number of stockholders who represent the ownership population of the company, suddenly ownership is open up to the general public at large. Additionally, an IPO brings a whole new group of restrictions and constraints to a company’s operational and financial management. Suddenly, the company must report earnings (or losses) in great detail on a quarterly basis, along with regular reports of the company’s assets and liabilities, cash flows, and other financial measures. Regular filings with the Securities Exchange Commission (SEC) must also take place.

  But aside from the paperwork (which the company’s management should be doing anyway even when privately held), becoming a publicly traded company changes the game with regard to how the company is financially managed. Suddenly, a whole lot of know-it-alls at investment houses and stock brokerages make public statements about where they expect your company’s earnings to be in the upcoming quarter or next year, or maybe even make bold predictions that your company’s stock will underperform that of your closest competitors.

  Basically, a whole new set of external factors come into play following a company’s IPO. But the primary reason a company goes public is not to subject itself to those external factors, but rather to unlock value in its ownership and allow early investors and employees who hold options to partake in (hopefully) increasing stock prices.

  However, your company’s management may decide that Going Public isn’t really for them at all. Maybe the stock market conditions are poor enough that IPOs are far and few between and even those companies bold enough to attempt an IPO are finding their shares priced significantly below what they would have fetched only a year ago. Or, maybe, the company’s business strategy changes in such a way that the company would be better off maintaining a privately held structure.

  Or, along the way, your company’s management might receive an attractive enough offer from another company that they decide to sell the company in its entirety rather than pursue Going Public. See Chapter 16 for a complete discussion of what happens in general and to your stock options when your employer is acquired by another company. (Hint: Usually, the result is pretty good for your stock options!)

  Of course, if your employer cancels an IPO or never even files to go public, the reason could be because the company has turned out to be a flop. (You knew there was a dark cloud hanging over this discussion after all, didn’t you?) Even though many of the high-profile Internet companies that failed in 2000 were companies that had already gone public, thousands of failed companies never even made it to IPO day.

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  Essentials of Venture Capital

  • Alexander Haislip(Author)
  • 2010(Publication Date)
  • Wiley

    (Publisher)

  The measure of a great investment is one that returns 10X an investor’s money over a normal five- to seven-year venture-investing time horizon. That means that a venture capitalist that puts $1 million into a start-up hopes to get back $10 million or more in a matter of years. It’s a rare occurrence, but that’s the goal.

  Going Public

  The best way to get to10X returns and beyond is to take a start-up public. Going Public means selling a start-up’s common shares to institutional investors via a stock offering. Those large financial institutions can then sell the shares on a government-regulated exchange, such as the NYSE or the NASDAQ.

  The businesses that run stock exchanges impose certain requirements on companies that wish to trade stock on their markets, and each exchange has slightly different rules. More important to a start-up looking to sell shares to the public are the rules and regulations imposed by the federal government, which mandates company financial disclosures and certain corporate governance practices. Federal regulation plays a big role in how start-ups think about Going Public, but we’ll discuss more on that later.

  Interestingly enough, there are no provisions from either the government or the exchanges themselves that require listing companies to be profitable, or even to have any revenue at all. So there are no lower bounds on company size, assets, or operations. In fact, there’s a whole class of companies—special purpose acquisition corporations (SPACs)—that go public with no assets or operations at all!

  Could two graduate students in a garage go public? Yes. The only real question to consider is whether people would buy the stock.

  That’s something that investment bankers spend a lot of time trying to determine. A company, or its venture capitalists, will hire bankers to consult on a start-up’s chances of connecting with public market investors.

  But Going Public is something of a misnomer, as companies don’t actually sell their shares to the public in the process. Most of the time, they sell their shares to an investment bank that underwrites the IPO. The investment bank then sells those shares to its large institutional clients. The bank may promise to give a “best-efforts attempt” to sell the shares to its clients or may offer a “full commitment” to either sell the shares to its clients or buy them itself.

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  Essentials of Corporate and Capital Formation

  • David H. Fater(Author)
  • 2009(Publication Date)
  • Wiley

    (Publisher)

  Willie Sutton robbed banks because that is where the money is. Companies go public because that is where the capital is, and they need to access that capital. Given today’s uncertain capital markets, there is no assurance that just because a company has become public, it can raise additional capital.

  7. Pathway to mergers and acquisitions. Mergers and acquisitions are always part of a company’s long-range growth and strategic plans. Unfortunately, private companies often lack the financial connections and resources to accomplish an aggressive merger and acquisition strategy. Obviously, a merger may provide a product diversification solution and completion of product lines, additional executive talent and depth, economies of scale, and entry into otherwise closed markets. The going-public process provides a company with two additions to its financial resources that private companies do not possess: potentially more cash, through subsequent financings/offerings, and the use of the company’s own stock as currency, since it now has an established value in the marketplace. The use of your company’s stock as a currency has many perceived advantages from both a business and tax perspective that may enable a company to accelerate its merger strategy.

  8. Enhanced corporate image and increased employee participation. Being a public company with shares that are actively traded can bring recognition and credibility to the company, thus enhancing its corporate image and competitive position. By being able to capture the attention of the financial community and related press, the company can obtain free publicity, which further boosts its corporate image and creates even higher demand for the stock. This has a beneficial cycle of driving demand, thus increasing the price of the stock, thus further increasing demand. Additionally, once the company becomes an established public company, it can offer employees meaningful stock option programs and restricted stock award programs, driving employee loyalty and making recruitment easier.

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  Emerging Markets

  Performance, Analysis and Innovation

  • Greg N. Gregoriou(Author)
  • 2009(Publication Date)
  • CRC Press

    (Publisher)

  Firms take advantage of this window of opportunity. 258 Emerging Markets: Performance, Analysis and Innovation In terms of advantages, the need for financing growth has been viewed as one of the most critical factors of Going Public. The advantage of Going Public is to obtain financing minimize the cost of capital and maximize firm value (Modigliani and Miller, 1963). Likewise, when Going Public, companies reduce the cost of financing because it avoids the interference by financial intermediaries. Choe et al. (1993) and Nanda (2002) sustain that companies raise public equity when they reach an extreme point at the business’ growth cycle whereby the need for external capital continues to grow. Although, there is some evidence that U.S. firms go public to finance their expansion (Mikkelson et al., 1997), this is not the case in Italy (Pagano et al., 1998) and in Germany (Fischer, 2000) suggesting that financial needs are not a critical factor in the decision of Going Public. Many authors (Pagano, 1993; Zingales, 1995; Stoughton Zechnev, 1998; Chemmanur and Fulghieri, 1999) affi rm that firm’s stockholders aim to diversify their wealth by rebalancing their portfolios. For example, Rydqvist and Hoghölm (1995) argue that the main reason for a Swedish firm Going Public is its wish for diversification. However, portfolio diver-sification can be achieved in a direct way by disinvesting in the firm that becomes public and investing in other assets; hence the motivation could come from either side. The liquidity of stock reduces the high transaction costs that a stock-holder must face when the company is not quoted in the capital market. Given that the stock liquidity of a firm is an increasing function of its vol-ume, the benefit obtained of having more liquidity will only benefit firms that are large enough to gain from this advantage and go public. A firm’s recognition and reputation is increased if it is quoted on a stock exchange (Maksimovic and Pichler, 2001).

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  Fundamentals of Corporate Finance

  • Robert Parrino, David S. Kidwell, Thomas Bates, Stuart L. Gillan(Authors)
  • 2021(Publication Date)
  • Wiley

    (Publisher)

  A seasoned stock, which is traded in a public secondary market, has an established record. Investors can observe how many shares trade on a regular basis (a measure of the liquidity for the shares) and the prices at which the trades take place. In contrast, the likely liquidity of a stock that is sold in an IPO is less well known and its value is more uncertain. For this reason, investors are less comfortable buying a stock sold in an IPO and thus will not pay as high a price for it as for a similar seasoned stock. In addition, out-of- pocket costs such as legal fees, accounting expenses, printing costs, travel expenses, SEC filing fees, consultant fees, and taxes can add substantially to the cost of an IPO. The costs of complying with ongoing SEC disclosure requirements also represent a dis- advantage of Going Public. Once a firm goes public, it must meet a myriad of filing and other requirements imposed by the SEC. For larger firms, these regulatory costs are not terribly important because they represent a relatively small fraction of the total equity value. However, regulatory costs can be significant for small firms. In addition to the out-of-pocket costs of complying with SEC requirements, the trans- parency that results from this compliance can be costly for some firms. The requirement that firms provide the public with detailed financial statements, data on executive compensation, Weblink For information on recent and forthcoming initial public offerings, go to www.ipoboutique. com 15.3 Initial Public Offering 15-11 information about the firm’s strategic initiatives, and so forth can put the firm at a competitive disadvantage relative to pri- vate firms that are not required to disclose such information. Finally, some investors argue that the SEC’s requirement of quarterly earnings estimates and quarterly financial state- ments encourages managers to focus on short-term profits rather than long-term value maximization.

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