The selected company is Wal-Mart. There are three options that are to be compared. They include the IPO, merger and acquisition.
When a company offers its shares for the first time to the public, it is known as an Initial Public Offer (IPO). Generally, a company opts for launching an IPO when it seeks expansion, diversification or modernization and needs funds for it or when it wants to restructure itself. The decision to go public is a crucial one as it results in dilution of ownership stake and diffusion of corporate control. IPO can be used as a financing as well as an exit strategy. (Khan & Jain, 2002) In a financing strategy, the main purpose is to raise funds and in an exit strategy, the existing investors offload their equity holdings to the public. Also, when the company has to expand through a merger or an acquisition, it can go for an IPO.
While going in for an Initial Public Offer (IPO), a company can raise funds through the issue of equity shares (ordinary stock) in the market. The issue of shares has its own advantages for the company. The capital raised through an IPO need not to be repaid. The equity shareholders are the owners of the company and they enjoy the residual profits after the preference shareholders and other creditors of the company are paid. Their liability is restricted only to the amount of capital contributed by them.
Also, they have voting rights, so they generally seek a long term commitment with the company. The firm issuing equity shares has an advantage of not having any fixed obligation for paying dividend and it also offers permanent capital. But, the cost of equity capital is more than the other forms of capital. This is so because the equity dividends are not tax deductible expenses and the cost of issue is high. (Pandey, 2005) Also, the equity shareholders enjoy voting rights. Excess of equity capital in the capital structure of a firm will lead to dilution of... [continues]
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