Advantages and Disadvantages of a Private Company Going Public
Mostly summarized from articles at Investopedia website.
An initial public offering (IPO) is the first sale of stock by a private company, thereby becoming a public corporation.
Private companies wanting to grow their company often use an IPO as a way to generate the capital (investment money) needed to expand.
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Before deciding whether or not to go public through an IPO, a private company must evaluate all of the potential advantages and disadvantages.
The decision is usually made during initial talks with the investment bank the company has hired.
Investment banks that manage IPOs can make substantial profits from fees and partial ownership.
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The main advantages for the company is as a public corporation it becomes larger and usually more profitable.
The capital raised by an IPO can be used to fund such things as buying factory equipment, research and development, and paying off existing debt.
Becoming public increases public awareness of the company.
IPOs generate publicity making the company and its products better known to the public, including to potential investors and customers.
An IPO also may be used by the company founders to exit their company.
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The newly created public corporation also faces several disadvantages.
One is the need for detailed disclosure of revenue and cost data to stockholder investors, who are new owners, this is information not disclosed to the public by private companies.
Privately held companies have more autonomy than public ones, the owner or small group of owners have full control and do not have to answer to a large group of shareholders.
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An IPO is an expensive and time-consuming endeavor.
To initiate an IPO, the private company must pay for the generation of financial reporting documents, audit fees, investor relations departments, and accounting oversight committees.
These are managed by the investment bank the company has hired to consider and carry out the IPO.
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Public corporations are regulated by the Securities Exchange Act of 1934.
This set requirements for periodic financial reporting, which are difficult and expensive for new public companies.
The Act also sets rules and regulations for public corporations monitored and enforced by the Securities and Exchange Commission.
The cost of complying with these regulatory requirements can be very high.
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Public ownership tends to cause companies to focus more on short-term results rather than long-term growth.
The actions of the corporation’s management become increasingly scrutinized as investors constantly look for increasing profits.
This also may lead management to use questionable practices, such as delaying needed investments, to boost current earnings.
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Becoming a public corporation is not the best choice for most companies. Generally, the smaller the company the less desirable becoming a public corporation is.
Less than one percent of U.S. firms are public corporations.
About 33 percent of U.S. employees work for public corporations.
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What was the sales volume of Microsoft when it became a public corporation?
ChatGPT:
When Microsoft went public in March 1986, the company’s annual sales (revenue) were approximately $197.5 million.
Key Highlights:
Metric >> Value (1986)
Annual Sales (revenue) >> ~$197.5 million
IPO proceeds raised >> $61 million
Market capitalization at IPO >> ~$777 million
The IPO proceeds are small compared to the market capitalization because the IPO only sells a portion of total shares.
The market capitalization values all shares, including those still held by insiders, at the IPO price.
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Helpful short video, “The Pros and Cons of A Company Going Public” within the article (after the advertisement):
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