Md. Miran Hossain College of Business Colorado State University
10 September, 2012
1. What are the advantages and disadvantages of going public? Discuss the IPO process. The Advantages of Going Public Financial Benefit The financial benefit in the form of raising capital is the most distinct advantage of going public. Capital can be used to fund research and development, fund capital expenditure or even used to pay off existing debt. Moreover, once the company is public, it has access to a new and liquid source of capital for any future needs it may have. Increased Public Awareness As IPOs often generate publicity by making a company’s products known to a new group of potential customers, it created public awareness of the company. Achieve Optimal Capital Structure Adding equity lowers the leverage (debt/equity ratio) of the company and helps equip the company with the tools to achieve optimal capital structure. The lowered leverage is, in fact, preferred by the lenders. Therefore, with the new equity in hand, a company can add a larger amount of debt, which will, in turn, result in a significantly higher debt/equity ratio. Increased market value The value of public companies tends to be higher than that of comparable private companies due to increased liquidity, available information, and a readily ascertainable value. Enhanced benefits for current employees Stock-based compensation incentives align employees’ interests with those of the company. By allowing employees to benefit alongside the company’s financial success increase productivity and loyalty to the company and also serve as a key selling mechanism to attract skillful human resource. Furthermore, issuing equity-based compensation will allow the company to attract top talent without incurring additional cash expenses.
The Disadvantages of Going Public An Expensive Process The cost of obtaining equity funding is an expensive process. Typical expenses associated with a public offering include underwriter fees, legal and accounting fees, filing fees, travel costs, printing costs etc. Lengthy Process Going public is a time consuming process, especially if the business and its management are not familiar with the registration process. The company will need to put all its business affairs in order and the day-to-day business operations will likely be disrupted. Loss of Ownership Loss of control is possible unless the owner has retained a large proportion of corporate stock. Otherwise, outside investors can either buy up shares to create large voting blocks or band together to create the same result.
Loss of Privacy The registration statement and subsequent reporting require disclosure of many facets of a company’s business, operations, and finances that may never before have been known outside the company. Some sensitive areas of disclosure that will be available to competitors, customers, and employees include: 1) extensive financial information (e.g., financial position, sales, cost of sales, gross profit, net income, business segment data, related-party transactions, borrowings, cash flows, major customers, and assessment of internal controls); 2) the compensation of officers and directors, including cash compensation, stock option plans, and deferred compensation plans; and 3) the security holdings of officers, directors, and major shareholders. Increased Financial Reporting Requirement When a company goes public, it can no longer keep much of its financial data confidential. Public companies has to meet the rules and regulations stated by the Securities Exchange Act of 1934 in regard to periodic financial reporting, which may be difficult for newer public companies. More importantly, especially for smaller companies, the cost of complying with regulatory requirements can be very high. Some of the additional costs include the generation of financial reporting documents, audit fees, investor relation...