Why would a company consider going public? What are some of the advantages and disadvantages?

Question description

this week instead of 2 papers and the instructors response, I will send you three paper to response to.

Paper 1gyl

A company’s decision to go public can be a very important and exciting venture. It can be an opportunity for growth, funds for research, product development, expansion and even acquisition. I will start by sharing some advantages of going “public.” First, going public means that a company can obtain funds that do not have to be repaid. This helps the financial condition of the company overall and gives them a great boost in equity. One great asset of going public is the ability to sell stock – which can be used to finance other ventures of the business. Going public also gives the company visibility and public light. Shares become marketable, which in turn makes shareholders happy. This is because they are able to diversify their portfolios, thanks to the public companies.

One of the biggest disadvantages is that company has to now get board approval and/or shareholder approval for certain matters. They now have to make sure that their decisions are in the interest of those that are investing in them. Also, when a company goes public, the SEC (Securities and Exchange Commission) requires them to release certain information and financial reports. Now, they have to also abide by regulations as to the validity of the information they release. Surprisingly, it can be costly for companies to go public. When you add up the legal fees, accounting fees, underwriting and etc., it can be a substantial offering and risk.

Brigham, E. F., & Houston, J. F. (2014). Fundamentals of Financial Management (8th ed.). Mason, OH: Thomson/South-Western.

Pros and Cons: Going Public. (2013, June 15). Retrieved February 14, 2017, from http://smallbusiness.findlaw.com/business-finances…

paper 2 dnl

Why would a company consider going public? What are some of the advantages and disadvantages?

A company will consider going public in order to raise liquidity or cash by selling a percentage of the owner’s equity to the public by issuing small parts of the company called shares. An added benefit from issuing shares is that they can be used to attract top management candidates through the offer of perks like stock option plans. Another plus from going public benefit is that stocks can be used in merger and acquisition deals as part of the payment. (Koba, 2013)

In addition of the liquidity going public also give a particular company more status or prestige by being listed in big stock exchanges in the market. When cash is collected from the issuance of shares money is usually used to expand the business or to reinvest in the company’s structure, which helps the company to growth bigger rather than staying as a private entity without this liquidity boost.

Initial Public offers help companies to raise capital without having to sell their equity or being force to have another partner to share their profits. In the other hand in order to make the initial public offer public some guidelines and regulations have to be applied to this process.

Going public is an expensive, time-consuming process. A corporation must put its affairs in order and prepare reports and disclosures that comply with U.S. Securities and Exchange Commission regulations concerning initial public offerings. Not only will you have to mobilize your staff to accomplish this work, you will have to hire specialists to take the company through the process, including attorneys, accountants and underwriters. (Master, 2012). In addition

Reference:

Koba, Mark. (2013). Initial Public Offerings, CNB explains. Retrieved from: http://www.cnbc.com/id/47099278

Masters, Terry. (2012).disadvantages of a business going public. Retrieved from: http://smallbusiness.chron.com/disadvantages-busin…

paper 3 krn

The decision whether to go public or not is an important part in the life cycle of a company. For a company, going public entails selling part of the company’s stock to external investors in undertaking an initial public offering (IPO) and then allowing the stock to be traded amongst the public markets (Brigham & Ehrhardt, 2017). The beneficial aspect as to why a company would contemplate going public is the accessibility to capital to increase growth and achieving greater liquidity (Chemmanur, He, & Nandy, 2008). Furthermore, it is a notion to the world that the company is succeeding as a business. However, a company going public must be able to front the hefty price tag; therefore a company must be well established and receive approval from all regulatory requirements.

The companies that are more likely to go public are those having less inconsistent information and with projects cheaper for outsiders to evaluate; their market characteristics are of greater market share, least amount of competition, capital intensity, cash flow riskiness also affect going public and those that the IPO’s occur at the peak of their productivity (Chemmanur, et al., 2008, p.5). The companies that choose to go public, for instance as mentioned in the book, Care.com, Malibu Boats, and Ally Financial all, as with anything else experiences advantages and disadvantages. Some of the advantages to going public are 1. Increased liquidity and enabling founders to collect their capital. The stock of a private corporation is illiquid; therefore it may be difficult for an owner that wants to sell shares to find a buyer and if so there is no base price set for the transaction (Brigham & Ehrhardt, 2017). 2. Permits founders to diversify. To avoid the riskiness of founders’ personal portfolios, by selling some of their stock in a public offering they can diversify their holdings and not just have their wealth entwined to the company (Brigham & Ehrhardt, 2017). 3. Facilities raising new corporate cash. The public disclosure of information and regulation from SEC makes people more likely to invest in companies, in turn allowing the companies to raise capital (Brigham & Ehrhardt, 2017). 4. Establishes a value for the firm. For instance, if the owner of the company dies, the state and federal tax appraisers need to set a price on the company for estate tax purposes (Brigham & Ehrhardt, 2017). 5. Facilitates merger negotiations. An established market price aids when a company is being acquired or seeking acquirement from other companies as the payment is stock. 6. Increases potential markets. It is easier to sell products and services to consumers after they become publicly traded (Brigham & Ehrhardt, 2017).

The disadvantages correlated to going public 1. Increased reporting costs. The cost associated with the quarterly and annual reports for the SEC and SOX can be a expensive especially for small companies (Brigham & Ehrhardt, 2017). 2. Increases disclosures requirements. There is certain information that the owners of the company may not want to disclose to the public i.e. net worth. But since a publicly owned company must disclose the number of shares its officers, directors and major stockholders own this can make it easy for anyone to estimate their net worth. Also, this information is available to competitors too (Brigham & Ehrhardt, 2017). 3. Increases risk of having an inactive market and/or low price. Small companies whose shares are not traded often, stock will not be liquid thus the market price might not show the stock’s true value. Hence, stockbrokers and security analysts do not follow the stock since there is not sufficient trading activity to even cover the cost of following it or earn brokerage commissions (Brigham & Ehrhardt, 2017). 4. Reduces owner/manager control. Management of publicly owned companies who do not have voting control must be concerned about maintaining control due to the tender offers and proxy fights. Managers must generate annual earnings gains, despite it being in the shareholders best long-term to reduce short-term earnings and then increases them years later (Brigham & Ehrhardt, 2017). 5. Increases time spent on investor relations. It requires CFOs 2 days a week having long extensive conversations with investors and analysts to keep investors in the well informed of current changes (Brigham & Ehrhardt, 2017).

In conclusion, companies that meet the financial requirements and intense SEC/SOX regulations, and views the advantages of an IPO as beneficial for the business, should begin the process of an IPO. The advantages definitely outweigh the disadvantages however; a company can always choose to go private especially small companies to reduce regulatory cost and reporting requirements.

References

Brigham, E. F., & Ehrhardt, M. C. (2017). Financial management: Theory & practice. Cengage Learning

Chemmanur, T., He, S., & Nandy, D. (2008). The going public decision and the product market. St. Louis: Federal Reserve Bank of St Louis. Retrieved from https://search.proquest.com/docview/1698165004?acc…

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