Why Pursue An Initial Public Offering (IPO)?

In deciding to pursue a public listing the benefits – both for the company and its shareholders – need to be carefully considered and weighed against possible downsides.

The principal benefits to existing shareholders of an IPO include:

• Greater marketability – shares in unlisted companies are usually illiquid, particularly for minority shareholders. Typically they can only be sold in very limited circumstances – such as the sale of the whole company – and often not at the time of the shareholder’s choosing. Once listed, shareholders benefit from a readily accessible market for their shares, and can make decisions to buy, hold or sell shares independently of other shareholders – although restrictions may apply to directors and other substantial shareholders.
  
  
• Increased market value – generally the value of a company increases significantly on a public listing, principally reflecting the increased liquidity of the shares, in addition to the greater confidence of investors arising through the transparency and regulatory requirements associated with being a listed company. As a result, the raising of capital through an IPO is generally significantly less dilutive to existing shareholders than a private equity raising or unlisted public offer.
  
  
• Diversification of personal portfolios – many business owners find that most of their wealth is tied up in the business. An IPO provides the opportunity to progressively realise this investment with a view to releasing cash and diversifying one’s personal investment portfolio. However, whilst IPOs are often considered in the context of an exit strategy, in most cases a full exit can only be achieved over a period of time.

Benefits to the company generally include:

• Access to long term capital – in addition to funds raised on IPO, listed companies have the opportunity to raise further funds through secondary capital raisings, such as rights issues and share placements.
  
  
• Improved financial condition – not only do funds raised through an IPO increase a company’s cash reserves or reduce its net debt, but the increased value of its equity and the transparency associated with being a listed company generally enable the company to secure a higher level of borrowings and negotiate more favourable terms with its bankers.
  
  
• Enhanced corporate image and credibility - listed companies enjoy an increased public profile through media coverage and analyst reports, whilst the knowledge that the company is required to comply with rigorous disclosure and governance requirements can enhance its credibility in the eyes of customers, suppliers and financiers. The downside, of course, is that any bad news will be in the public eye too.
  
  
• Employee incentivisation – employee share schemes, designed to attract, retain and motivate staff, can be more easily implemented by publicly listed companies, whose shares and options have a readily ascertainable value within a liquid market.
  
  
• Currency for mergers and acquisitions – acquisitive companies have the opportunity to issue shares as all or part of the consideration for acquisitions, enabling cash to be retained to fund future growth.

Of course, there are downsides too. Many substantial companies choose to remain in the private arena because of concerns around loss of control, restrictions on management flexibility and the transparency required of a listed company. It is important to determine upfront whether an IPO is the most appropriate option – this depends upon the key objectives and expectations of the company and its shareholders, and should involve consideration of alternatives. Equally important is the company’s suitability and readiness for listing.

Whilst some sectors may involve earlier stage ventures, the market will generally be looking for a proven business model, track record of profitability and growth, strong management, clearly articulated strategic growth plans and, of course, the ability to deliver on them.

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