The Road to Going Public
Going public and getting listed is a milestone for privately owned companies. In addition to fund raising, there are other advantages in going public.
Yet, behind the success stories of listed companies, there are barriers and roadblocks, including increased regulation and public scrutiny. In this article, we will explore the advantages and disadvantages of going public.
The most obvious reason for going public is to gain greater access to funds through the issuance of shares. The funds can be used for projects, growth, and expansion. For example, Xiaomi, which listed in HKEx in June 2018, plans to use its net proceeds from IPO for R&D, expanding and strengthening its internet business, global expansion, and working capital and other corporate purposes.
Compared with debt, equity is less risky because the company has no obligation to repay the principal and interest. Having said that, companies have to consider dividend policy to distribute its earnings to shareholders. Companies also have an opportunity to reduce its debt to equity ratio, a measure of financial health. A healthy ratio signals investor confidence, long-term sustainability and lower interest rates when applying for new loans. Getting listed also enhances prestige and credibility.
In the post-IPO stage, companies can attract, motivate and reward employees through share option plans without affecting companies’ cash flows. With a higher degree of transparency and disclosure of information, a public company can expect a higher valuation compared to a private company and benchmark its performance with competitors.
The road to being listed is a time consuming and expensive process. A well-planned IPO process can take more than a year and is supported by a team of legal counsel, underwriter, reporting accountant, and public and investor relations advisor. Once public, the company’s ownership is diluted and control decreases, which limits the management’s freedom to act, as certain major decisions require board and/or shareholders approval.
Corporate governance is a key concern for all stakeholders. It is a monumental task for companies to adopt and embrace leading corporate governance practices. This includes recruiting qualified independent board members, enhancing internal controls, and forming a qualified audit committee. In addition, the company has increased pressure to deliver on its financial targets and business plans; otherwise, it faces investors’ loss of confidence and a tumbling share price.
Lastly, there are mandatory disclosure requirements in annual reports, such as corporate governance, financial reporting, related party transactions, subsequent events and environmental, social and governance practices. Companies must be transparent in all aspects of their business.
Going public is not for all companies. Companies must consider all the relevant factors before committing to the IPO process. Factors include the company’s current corporate governance and business model, growth potential and market size, long-term plans and its competitiveness, internal controls and financial results. Start your IPO journey early to seize the IPO opportunity when it comes.