Eternity Law International — News — Difficulties and advantages of going to IPO

Difficulties and advantages of going to IPO

Published:
November 12, 2018

Let’s list the main advantages of going public:

  1. The amount of cash and long-term capital will increase. It is the attraction of funds that will make it possible to support growth, increase the amount of funds in circulation, make capital investments, increase research and development, refinance, reduce debts, etc.
  2. The market value of the company will increase. Due to the greater liquidity and the presence of information about the company in available sources, it becomes possible to more accurately determine the price of public enterprises, which usually exceeds the value of comparable private companies.
  3. Mergers and acquisitions. Once a company has listed its shares on the stock exchange. They move freely on the stock market and can be used as currency to buy other companies.
  4. Liquidity will increase. Shareholders can benefit from an increase in the value of a particular company’s shares and its liquidity. A portfolio of shares owned by one owner can be used by him as collateral for taking out a loan, or bring profit from its sale on the open market.
  5. Motivating important professionals. Key professionals may be motivated by the possibility of obtaining rights to the company’s shares. This promotes long-term cooperation and attitude to work as to your own business that needs to be developed.
  6. The reputation of the company will improve. Much depends on the choice of a site for placing shares on the stock exchange. A correctly occupied place will give an opportunity to advertise the company and its product, make it recognizable, popular and in demand not only in your country, but also at the global level.

 

It will also give additional points towards increasing confidence in the company from interested exchange participants.

Challenges of going public – Challenges and benefits of going IPO

The most common mistakes are made when calculating the time required to enter the exchange. The management also underestimates the problematic nature of the transition from a private company to a public one. The biggest obstacles that stand in the way when considering the option for a company to enter the IPO are:

1. Meticulous planning and preparation. If the company’s management has definitely decided that it will enter the IPO, then it should start a dialogue on this issue in advance. There is a lot of work to be done to prepare for the IPO. Any company can control the moment of preparation for IPO, in contrast to the moment of entering IPO.

2. Participation of the company’s management in the process of preparing for the IPO. Preparing for a company’s IPO takes a lot of time and energy for the company’s management, which can interfere with solving the company’s current problems. And managerial responsibilities shouldn’t get in the way of preparing for an IPO.

3. Confidential information becomes open. If private companies can have more private data about a company, then according to the regulatory requirements, for open companies there is much less such data. Now the information will become publicly available:

• financial information containing information about the results of activities carried out by products or segments;
• bonuses to all representatives of the top management;
• what shares each of the company’s leaders has, who is still a shareholder and what is his share of shares.

4. What results are expected from the company’s work. If the owner manages a private company at his own discretion, then when it acquires the publicity status, the situation changes. Decision making now depends on the consent of the majority of shareholders. In addition, it is necessary to report to them on the work done, the financial turnover of the company.

Investors and analysts will expect an increase in the number of sales, an increase in profits from the head, and may require an increase in the assortment due to new products. The management of a public company is under pressure. It must simultaneously accelerate the company’s growth in a short timeframe, as well as develop a strategy for long-term ambitions for the future.

5. Restrictions have been established on the redemption of shares by the current owners of shares. There is a period of about 180 days, called “lock up”. During that the shareholders of a company that has entered the IPO cannot sell their shares. This limitation is regulated by the rules in force on some exchanges and market practice on others.

6. Cooperation with investors. It takes a lot of time and effort to provide investors with all the necessary information about the state of affairs in the company. Therefore, to communicate with them, an additional person (or people) is hired who answer their requests, prepare presentations and publications, financial reports and meetings with company management.

7. Risk of absorption by the company of competitors. If there are shares of a company that remain on the open market, then it is at risk of being taken over by another company, even competitors. Everything happens due to the impossibility in such a situation to control the investor base.

8. There is no turning back. You can try to return from a public company to a private one, but this process can drag on for an indefinite period and lead to a large financial loss.

9. Investors expect from the enterprise in which they have invested, positive dynamics in development from period to period. They also require the timely submission of a financial report.

10. Information on finance for the previous stages. Here we are talking about the difficulty in providing information for the previous stages associated with the complication of financial history, the transition from one financial reporting standards to others, the replenishment of information with declassified data, the requirements for financial statements are much stricter.

For a public company, financial statements must be issued quarterly and semi-annually, as well as annually. For the correct submission of the report, you must strictly follow the instructions, observing the rules of data disclosure. For public companies, financial reporting deadlines have been reduced compared to a private enterprise.

11. Selecting an exchange floor. Each of the exchange platforms has its own terms of placement. They can be:
• the profit of the enterprise for the past one or several periods must be within certain limits;
• share capital of a certain size;
• the number of shareholders after the placement procedure;
• requirements for the quality of management;
• the size of the market capitalization.

Taking into account all the conditions put forward by each of the platforms, you must choose the most profitable and suitable one for your company.

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