05 Sep Why Does a Company Decide to Go Public?
Why would a company choose to list on the stock exchange in the first place?
The most obvious answer, and the most common reason, is to raise a large amount of cash to expand an existing business. Going public and offering stock in an initial public offering (IPO) represents a milestone for most privately owned companies. Many reasons exist for a company to decide to go public, such as obtaining financing outside of the banking system or reducing debt. This money can be critical for hiring more people, building facilities and creating breakout products, and it also can be extremely helpful for making important business-growing acquisitions.
From the point of view of a private company, this is certainly almost always the case, although there are other reasons that have become increasingly prevalent over recent years. The most striking of these is to create a huge amount of wealth for the individual shareholders of the private company. During the bullish market conditions of the late 1990s it was common for investors and business owners to use the listing process to get cash for their investments. Individuals who had the ability and timing to make investments in soon-to-be-listed companies generated millions of dollars. Many examples of this process can be found in the so-called “tech boom”, which began in the second half of the 1990s. During the boom first day profits, upwards of 1000%, were not uncommon for some high-profile technology listings.
Being a publicly trading company is considered a major achievement. And it also is a statement — it means a company has the capability to meet rigorous federal regulations. This is especially important for companies that eventually want to land larger customers. Going public provides a sense of corporate stability.
The value of private stock is difficult to determine. After all, it’s usually difficult to convert it into cash. But such is not the case with public stock. And because of this, a company can use its stock as currency to buy other companies.
The fact is that by being public, a company’s key supporters can get rewarded for their efforts and risk-taking. This means being able to sell shares in the company over time. Often, these stock options can be worth much more than an employee’s salary. In Facebook’s case, more than a thousand employees are millionaires because of their stock options.