WHY DO COMPANIES IPO?
Roy Davidson, 10 June 2021
An IPO (or initial public offering) is simply a company making its shares available to trade on a public market – the NZX for example – for the first time. Once shares are listed on an exchange, anyone, from institutional investors to those just starting out, are able to buy and sell shares in the company.
Well-known companies to go down the IPO route in the past few years include Airbnb, Beyond Meat, Squarespace, My Food Bag, and Napier Port.
What benefits does a share market listing provide?
The first and most important benefit to listing on the share market is the ability to access capital. Having a ready source of capital (money provided by shareholders) enables a company to pursue growth opportunities. For instance, a company may sell shares on the market in an initial public offering to fund a launch into a new market or to invest in new products.
However, it’s not all about the IPO. Once a company is listed, it makes it much easier to raise additional capital than an unlisted company. Many companies were reminded of the benefits that a share market listing brings last year when they asked investors to provide additional capital to insulate themselves against the effects of COVID-19.
Companies that raised capital through this time included Auckland Airport which saw plane traffic dry up, SkyCity whose properties were forced to close, and Vista Group which continues to feel the impact of a slow cinema industry.
Companies listed on stock exchanges also have to follow a set of listing rules. This, along with the extra transparency a market listing brings, can raise governance standards and future proof the business.
A public listing can also raise the profile of a company. All of a sudden, your company is being mentioned in the financial news and in share clubs. It’s free marketing (for the most part). Being listed can also lend legitimacy in overseas business dealings.
Sometimes a company may pursue an IPO, not to raise capital, but to provide an ‘exit’ for an existing shareholder. This shareholder, be they founders or professional investors, may have owned the company for a number of years and be looking to move on to the next opportunity. In this instance, selling to the public via an IPO is a viable option.
What are some of the drawbacks?
The first drawback is that an IPO can be a costly endeavour – there’s legal and banking fees, registration and printing costs to take care of. It is also time consuming and all the effort management put into the process can take away from the important job of running the company.
Being a listed company also brings with it a new set of challenges. Being transparent and open with shareholders is crucial – they are after all the owners of the company. However, this extra information can potentially be used by competitors (who may or may not be listed) to gain an edge.
With thousands of new shareholders, there is also a loss of control. As anyone can buy shares in a listed company, company management may face new pressures to change its strategy or personnel, including that of the board. This is sometimes termed investor activism. For similar reasons, the company may find itself the subject of an unfriendly takeover.
Finally, demands from new shareholders may also cause a company to focus too much on the near-term in order to deliver strong results. However, this may come at the expense of what is the best for the long-term health of the company.
The world’s largest exchanges
Stock exchanges are a reasonably new phenomenon, with the oldest, the Amsterdam Stock Exchange (now part of Euronext), being less than 400 years old.
The strong growth in stock exchanges and listed companies in the years since are testament to the benefits a public listing can bring, despite some of the downsides. There are now more than 60 major stock exchanges globally with a combined total value of over US$110 trillion and sporting around 50,000 listed companies.