Why do companies go public?

Here are the Top 3 reasons companies go public. Nearly 100 companies held IPOs last year, but why exactly did they take the plunge?

Every month or so, a high-profile technology company makes headlines with an IPO (or initial public offering) of stock. By doing so, those companies are transforming themselves from private corporations to public corporations. That transformation costs millions of dollar and brings with it a whole lot of intense scrutiny from the media and investment community. It also threatens to change the corporate culture of a company and fixate it on short-term rather than long-term results. And yet, nearly 100 companies held IPOs last year (excluding ADRs, REITS, limited partnerships and a few other categories). Why did they take the plunge? Here are the Top 3 reasons companies go public:

1) Boatloads of cash. When a company goes public, it’s actually trading equity for cold hard cash – and lots of it. Just how much money is at stake? That depends on the company’s profitability and prospects for growth. Russian search engine operator Yandex (NASDAQ:YNDX), for example, raised $1.3 billion on May 25 in exchange for 16.2 percent of the company’s equity.

After an IPO, a company’s free to use that cash however it sees fit, and it never has to repay a penny (not a bad deal, eh?). Most companies use that money to pay down debt, acquire new businesses or invest in future growth. Often, companies do all three. The catch is, the company must release detailed quarterly financial records that adhere to strict standards set by the SEC. Investors then use that financial data to determine whether or not that company is a good investment.

2) Brand awareness. Since it costs so much (typically between $10 million and $30 million a year, per SFGate.com) to satisfy the accounting and legal costs associated with being publicly-traded, most companies prefer to take the easy route and remain private. Companies that do decide to go public get boatloads of press, consumer awareness and exposure for new products. Because it’s so difficult to go public, the act in itself lends a new level of cachet or prestige to a brand. All told, BusinessWeek lists just 33,000 public companies around the world.

3) Playing with the big dogs. The world’s largest private company (according to Forbes) is Cargill. The agribusiness company logged estimated sales of $109 billion in 2009. Compare that with Exxon Mobil Corporation (NYSE:XOM), which regularly tops lists of the largest public companies in the world. Last year, XOM’s sales exceeded $430 billion – nearly four times as much as Cargill’s 2009 sales.

Going public gives companies a competitive advantage for a number of reasons. Most importantly, they have access to more capital, and they can get that capital for cheaper than their private counterparts. In addition, public companies are no longer subject to SEC rules that limit private companies to fewer than 500 shareholders. That means public companies can offer bigger pools of employees equity stakes. That gives them a powerful tool to recruit and retain the top talent in their respective industries.

Because public companies have access to more cash, they can also buy out competitors and start-ups, using acquisitions as a tool to fuel growth. Since Google, Inc. (NASDAQ:GOOG) went public in August of 2004, for example, the search engine has acquired more than 85 other companies as it expands into new areas, buys new revenue sources and speculates on up-and-coming technologies. Smart acquisitions help bolster bottom lines for public companies that are eager to keep their shareholders happy. And the larger those companies get, the more acquisitions you’re likely to see.



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