The stock market has no shortage of buzzwords, with IPO counted amongst the most prevalent. Whenever there is a mention of an IPO or Initial Public Offering, it is common to find phrases such as XYZ company is set to go public. Have you ever wondered why a company that announces an IPO is said to be going public or why private companies opt to issue IPOs?
When a company launches a share market IPO, it invites the public to apply for its shares for the first time. Since an IPO is the first public share offering by a previously privately held company, the process of issuing an IPO is synonymous with a company going public.
Major Reasons Why a Private Company Goes Public
Private companies can decide to go public and launch an Initial Public Offering for a variety of reasons. Here are some of the key reasons for private companies going public:
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To use a public issue as a source of capital: The foremost reason for most private companies to launch a share market IPO is raising capital. Companies require capital to fund their existing operations as well as future plans. The sources of capital for private companies are fewer than those for public companies, and after a point, most such options may become unviable. In such a scenario, raising capital through a public issue is usually the ideal option.
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To widen its shareholder pool: Another factor that drives private companies to opt for a share market IPO is the opportunity to diversify their shareholder pool. It is worth noting here that prior to going public, a private company usually has a limited number and category of shareholders – mostly promoters and venture capitalists. With an IPO, however, such a company can have a larger number of investors spread across various categories.
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To offer higher liquidity and an exit route to its existing shareholders: A share market IPO is also integral for private companies aiming to offer an exit route to their existing shareholders. Once the IPO process is completed and the company gets listed on a stock exchange, the aforementioned shareholders can easily sell their shares in the market (should they wish to) by way of an Offer for Sale.
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To have better market standing: Another key reason for companies to choose share market IPOs is the potential to have greater visibility and better market standing. A public company has to comply with a host of regulations, which makes it more credible for a variety of stakeholders, ranging from potential retail investors to institutional investors and prospective clients.
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To make future mergers and acquisitions easier: The process of launching a share market IPO and becoming a listed company can help said entity raise the funds required for future mergers and acquisitions, and also raise its credibility.
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To make its shares more liquid: Once the shares of a company get allotted through a share market IPO, the company gets listed and said shares can be traded in the stock market. Open to the market forces of demand and supply, the stock prices could register a substantial rise and attract investor attention. With the shares being readily marketable, the company becomes more investable.
The Bottomline
While there can be a host of reasons fuelling a private company’s decision to launch a share market IPO and become a public company, there can be no doubt that such an action opens the vistas for diversified shareholding, higher liquidity for existing and new shareholders alike, and a potentially stronger market position.
