Pros and Cons of Going Public

The decision to take a company public is a huge one. When a company gets listed on an exchange, it joins an elite list of institutions that have done so creating a positive reputation. However, listing on the exchange is about a lot more than reputation. There are a lot of tangible benefits that accrue to companies that list on the exchange. Also, there are a lot of disadvantages that such companies have to face. In this article, we will list down the pros and cons of going public.

Advantages

  1. Increased Capital:

    The most obvious benefit of listing on the stock market is easier access to capital. Private limited companies have a hard time raising capital. This is because once an investor invests money, they are locked in with the company. However, in case of a public company that is not the case. Investors can enter and exit the investment at their own convenience. There is an active secondary market for all stocks listed on the exchange. Therefore whenever an investor wants to sell their investment they can do so and, there will always be someone else willing to buy. This liquidity makes investors willing to part with cash more easily than they would have otherwise done. Therefore companies listed on the exchange have more access to capital and therefore more opportunities.

  2. Higher Valuations:

    Companies that have their shares listed in the stock exchange have investors competing with one another to invest in them. As a result of this competition, the price of the shares is driven higher. Sometimes, the price goes abnormally high, and a bubble is formed. However, usually, the price reflects the true valuation of the firm. Since the stock market makes it possible to put a price tag on public sentiments about a firmís business, many successful businesses watch their valuations soar when they list on the exchange. The primary beneficiaries of such a price rise are the existing investors and most of all the promoters.

  3. Reputation:

    All major companies in the world are listed on stock exchanges. In fact, every company in the Fortune 500 is listed on some exchange or the other. Also, stock markets have minimum listing requirements which allow only businesses that have attained a certain level of growth and success to list with them. Hence when a company gets listed, all its stakeholders, including its suppliers and employees start viewing it with more respect. Listed companies are considered to be larger and more efficient than other companies.

Disadvantages

  1. Loss of Control:

    The biggest disadvantage of taking your company public is that the promoters tend to lose control over the workings of the corporation. Whereas earlier, the promoters could make their decisions unilaterally but now they need to have a certain number of shareholders approving the decision. The worst consequence of going public is when the promoters dilute their holding way too much. In such scenarios, competitors and investors can just buy the majority holding from the marketplace and end up conducting a hostile takeover. Over the years, many entrepreneurs have lost control over their businesses because of a hostile takeover.

  2. Loss of Privacy:

    Privacy can be an extremely important asset when it comes to conducting business. The more information, a company gives out about itself, the more competitors can find out about the inner workings and the strategy being followed. However, when a company goes public, it is required to disclose its financial results periodically. These financial results can be reverse engineered to make a fair estimate about the operational strategy that is being followed by a company. Thus, going public may make a company lose its competitive edge especially if its edge is based on withholding certain information from their shareholders.

  3. Performance Pressure:

    Going public creates enormous pressure on companies as they are required to perform every quarter. The financial results of the company are reported every quarter and the stock market is notorious for having very little tolerance for declining performance. Some long-term strategies require short-term decline in performance. For instance, if a company is investing for future growth, the results may not show up immediately. However, that does not mean that the company is not performing well. Going public therefore creates a scenario wherein the company also becomes short-sighted in its bid to keep the investors happy.

  4. Cost of Compliance:

    When companies list on the stock exchange, they have to spend an enormous amount of money trying to comply with the regulations that result from such listing. For instance, audits need to be done every quarter; financials need to be published every quarter, the management reviews also have to be sent along with the financials and therefore a whole lot of tasks need to be performed. All these tasks require the company to hire specialists and pay them fees periodically. A company that is not listed on the exchange need not be so stringent about compliance and hence is not required to spend nearly as much. Listing a company on the stock exchange, therefore, requires huge upfront payments to investment bankers as well as regular expenses to other specialists that need to be incurred periodically over the companyís lifetime.


❮   Previous  Article Next  Article   ❯

Authorship/Referencing - About the Author(s)

MSG team comprises experienced faculty and professionals who develop the content for the portal. We collectively refer to our team as - “MSG Experts”. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.

Corporate Finance