Why Would a Company Consider Going Public?
After establishing their private companies, many executives choose to take their firms public in an initial public offering (IPO). Shares of the company are thereafter sold on a public stock exchange, and the company's management must provide more detailed public accounting of their performance. Despite that added requirement, there are many reasons why a company would consider going public.
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Raise Capital
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An IPO allows a business to raise capital needed for future expansion. The company sells a set number of its shares at a given price, and investors pay the firm money for the shares. Though the existing stakeholders are diluted, the public offering provides the company with the capital needed for future growth. It can also allow the firm to pay off costly debt. After the initial public offering, the company can later tap the equity markets again to raise more money in a secondary offering.
Stakeholder Liquidity
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It's not always easy for stakeholders in private businesses to sell their shares in the company if they need cash. Private businesses are highly illiquid. When a company is taken public, however, it's much easier to find buyers on the public stock exchanges. This allows early stakeholders to more easily sell some or all of their shares in the company.
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Boost Stock Price
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The excitement around an IPO, particularly for an already well-known private company such as Google or Visa, can lead to huge demand for the stock. That demand pushes up the price of the company's stock, often leading to huge paydays for the early investors in the private entity. Even stakeholders who plan to keep their shares benefit from seeing the value of their portfolios rise.
Public Awareness
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Publicly traded companies typically get more media attention than private firms, which can help raise customers' awareness about the business. This can help attract the best management and increase sales. It also raises the firm's prestige, which can be a source of pride to the early investors and founders.
Future Acquisitions
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Many mergers and acquisitions are financed using publicly traded stock. After an IPO, a company looking to take over other businesses has a funding source apart from just cash or debt--they can issue more shares. This is harder to do for private businesses that have thinly traded stocks, and this disadvantage could hurt their competitive position.
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