Introduction
Between 2009 and 2013, numerous companies have changed from public to private, in order to avoid the financial backlash of the economic crisis that shook the global economy during those years. In order to respond to the various economic challenges arising during those years, many smaller companies were absorbed by the larger ones through mergers, which provided the companies with extra resources and monetary funds in the absence of reliable investment flow. Nevertheless, it has been 5 years since the last critical failure of the market, and the economic situation is slowly returning to normal. In order to enjoy the benefits of enlarged cash flows, better exposure, and more confident positioning, companies should consider going public and rejoining the financial market with a substantial initial public offering (IPO).
Benefits of Going Public
Going public has numerous advantages to offer to well-established companies as well as to newcomers to the financial market. One of the greatest benefits of developing an IPO is the amount of funding it provides for the company. Corporate entities like Google and Facebook managed to attract significant resources when they went public (Voigt, Buliga, & Michl, 2016). Coupled with an innovative product or service, going public is an excellent way to expand the company’s reach and market share. With many companies having gone private, the investors are starving for fresh stock. Being among the first to open up to the public could help the company to ride the wave and get the fringe benefits of being the first (Arisanti & Marwan, 2018). In addition, joining the financial market and opening one’s reports would be a sign of confidence in one’s capabilities to provide benefits and income to potential investors.
As is the case with middle-sized and large companies, going public can find the company investors among their own employees. Many individuals who work in an organization and are interested in promoting its interests would buy its stock (Tricker, 2015). As a result, they would be more motivated in the company’s success, as the stock prices are directly connected with their individual performance. Lastly, going public would improve the reputation of both the company and its principal owners, demonstrating the level of maturity and confidence in their business.
Cons of Going Public
Of course, going public has always been an option that entails specific risks and inconveniences. One of the biggest ones is the requirements for complete transparency. The Oxley-Sarbanes Act of 2002 was created after the last financial crisis, and its policies have only become stricter since the crisis of 2009 (Tricker, 2015). Hedge funds are under particular scrutiny, as the public, as well as politicians, distrust hedge fund companies due to their relatively unregulated corporate policy (Tricker, 2015). The requirements for transparency are associated with additional paperwork and expenses, as the company needs to present financial reports about their monthly, quarterly, and yearly activities to the government, Wall Street, and other financial market institutions (Yalcin & Unlu, 2018). If the company is suffering problems, or if its position is not as secure as initially thought, going public would result in profit loss. Such a situation happened to Dell, which was forced to go private in 2013 to avoid further losses (Voigt et al., 2016).
Another reason to avoid going public is if the company required direct micromanagement and an authoritarian form of control. Going public usually invites a great number of stakeholders to the table. Without anyone holding the majority of the stock, it is possible for additional members to induce discord and steer the company away from its originally intended direction. However, this would not be a concern for companies with plenty of stakeholders already involved in corporate governance. For private entities with the number of stakeholders exceeding 500, going public would be preferred, as the financial disclosure demands are roughly the same from that point (Voigt et al., 2016).
Lastly, a company should avoid going public if it is not yet ready to step up its game. Financial markets are a highly competitive environment, where the company would be judged in comparison to many others, based on performance. If the enterprise has issues with its supply chains, manufacturing processes, management, and financial performance, it would be recommended to avoid going public until those issues are resolved.
Conclusions
Although going public is a risky venture, doing so would enable strong and competitive companies to increase their market share and attract the investments needed for expansion. With some of the leaders in the market losing their positions due to closing up and reducing their output to accommodate for declining production demand, there is plenty of opportunities for expansion. Some of the potential venues for exploration include the IT area, the automobile industry, the fuel sector, and the healthcare sector, especially in the US (Fjesme, 2016). Although there are some potential risks to going public that may prevent some companies from succeeding, the majority of competitive forces would benefit from going public again.
References
Arisanti, I., & Marwan, A. (2018). Herding behavior post-initial public offering in Indonesia stock exchange. Jurnal Akuntansi dan Investasi, 19(2), 149-159.
Fjesme, S. L. (2016). Initial public offering allocations, price support, and secondary investors. Journal of Financial and Quantitative Analysis, 51(5), 1663-1688.
Tricker, B. (2015). Corporate governance: Principles, policies, and practices (3rd ed.). Oxford, UK: Oxford University Press.
Voigt, K. I., Buliga, O., & Michl, K. (2016). Business model pioneers: How innovators successfully implement new business models. New York, NY: Springer.
Yalcin, N., & Unlu, U. (2018). A multi-criteria performance analysis of initial public offering (IPO) firms using Critic and Vikor methods. Technological & Economic Development of Economy, 24(2), 534-560.