Why do companies go public?
Introduction
Listing companies on financial markets and offering their shares for public subscription is a vital strategy that many organizations rely on to achieve their financial and expansion goals. There are many reasons and motivations behind this decision, all of which serve to enhance the company's growth and achieve financial sustainability. In this article, we detail the most prominent reasons that motivate companies to go public and analyze its benefits for both the company and investors.
Main Reasons for Listing Companies on Financial Markets
1. Raising Capital for Business Expansion
One of the most prominent motivations behind listing companies is the need to raise capital.
Private companies often rely on limited funding from their founders or a small group of investors.
When a company faces growth challenges or expansion opportunities that require significant investments, internal financing becomes insufficient.
Rather than resorting to bank loans and bearing the burden of high interest rates, going public is a safer and more effective solution.
Expanding Projects and Activities:
Listing allows companies to finance large-scale projects such as:
- Entering new markets.
- Developing innovative products.
- Enhancing production and service capabilities.
2. Facilitating investor access to the company
Listing on the stock market opens the company to a broad base of individual and institutional investors.
Benefits of accessing new investors:
- Enhancing opportunities to raise funding quickly.
- Increasing the company's reputation and brand awareness.
- Diversifying funding sources and reducing dependence on existing investors.
Public Offering Mechanism:
When a company is listed, a portion of its shares are sold to the general public, providing immediate capital without the need to repay future loans.
3. Financing New Projects or Repaying Debts
The capital raised from a public offering is not limited to expansion, but extends to several other financial objectives.
Examples of Capital Use:
- Financing ambitious future projects.
- Repaying existing debt to reduce the interest burden and improve the balance sheet.
- Improving the company's internal infrastructure and technologies.
Acquisitions:
Some companies use their listed shares as currency to acquire other companies without the need to pay direct cash, accelerating the pace of expansion.
Additional Benefits for the Company Upon Listing
1. Increased Cash Liquidity for the Company's Founders
Listing enables founders and early investors to easily convert a portion of their investments into cash.
How is this achieved?
- By selling a portion of their shares in the market.
- Or using the shares as collateral to obtain new credit facilities.
Importance of this shift:
It gives founders and early shareholders an opportunity to diversify their investments rather than keeping them solely tied to the company's future success.
2. Improved Reputation and Market Confidence
The mandatory financial disclosure required of listed companies has significant benefits.
Improved Public Image:
- Increased transparency and credibility for customers, investors, and partners.
- Gaining a strong reputation as a reliable company committed to global financial laws and standards.
Impact of Positive Reputation:
It enhances confidence in products and services, attracting more potential customers and investors.
Benefits of Listing for Investors
1. Providing the opportunity to invest in promising companies
Listing provides individual investors with the opportunity to invest in companies that may have a promising future.
Advantages of this opportunity:
- Investing reasonable amounts without the need for large capital.
- Achieving future profits as the company grows.
Example:
Instead of needing to purchase a large stake in a private company, an investor can easily purchase a limited number of listed shares.
2. Ease of entering and exiting the investment
One of the most important advantages of investing in listed companies is high liquidity.
Why is liquidity important?
- Shares can be easily sold at any time through trading apps or banking platforms.
- It reduces the risk of being locked into an investment for a long period without being able to dispose of it.
Compared to private companies:
In unlisted companies, selling your stake may take months or years, and sometimes requires the approval of other shareholders.
Challenges Companies Face After Listing
1. Commitment to Transparency and Disclosure
Although transparency provides competitive advantages, it also imposes significant obligations.
Details of the obligation:
- Providing accurate quarterly and annual financial reports.
- Disclosing material events as they occur.
Impact on Management:
Committing to transparency requires building strong financial control systems and increasing spending on governance and compliance.
2. Fluctuations in Stock Valuation
Once a company is listed, its share price is vulnerable to daily market fluctuations.
Factors Affecting Price:
- Global economic news.
- Company financial performance.
- Changes in investor sentiment.
Volatility Risks:
Can temporarily reduce the company's market value, even if the business fundamentals are strong.
Conclusion
The decision to list and go public is a powerful strategic move that opens up numerous opportunities for growth and financial sustainability. By increasing capital, enhancing liquidity, and improving reputation, companies can more efficiently achieve their expansion goals.
For investors, listing provides profitable investment opportunities, with flexibility and ease of buying and selling.
Public listing is a double-edged sword, requiring companies to carefully plan and manage the opportunities and challenges involved to ensure long-term success.