A critical look at Initial Public Offerings [IPOs]
Beginner Stock Market Investing, Stock Market Investing Advice, Stock Market Investing Strategies
Sometimes, you can witness a large run-up in prices of stocks of companies that have just gone public and many company owners as well as investors consider IPOs to be the guaranteed route to accumulating large amounts of riches. While many companies launch IPOs to raise capital from the public for future business growth and to obtain a listing, the listing also provides the opportunity for the initial investors in the company to cash in on their investment. However, initiating and completing an IPO is not an easy process and there are many hurdles to be tackled before new cash materializes. Many companies will think that they are ready for the big time by launching an IPO on the NYSE or NASDAQ, but, in truth, they are not really prepared for the offering.
Going public with an initial stock offering is an effective way of raising equity in cash for a corporate enterprise. It is however a time-consuming and expensive process and, with the risks involved, when a company needs to make a proper assessment of the advantages and disadvantages before deciding to go ahead. There is no doubt that there are many benefits to going public, there are disadvantages in terms of legal restrictions and increased compliance with statutory requirements. There are also some additional risks that have to be considered.
Here are some of the major advantages:
-raising a pool of capital for future business growth. The company does not have to incur debt and pay the associated interest costs and has much greater flexibility in the use of money. Free of restrictive debt covenants, the company can use equity for long-term requirements such as brand building and marketing, new product development and the creation of the necessary manufacturing infrastructure. The company can also hire and retain the best of the talent in the market by offering lucrative compensation including attractive stock options.
-providing an exit route to investors because the listing allows these investors to sell their stocks at any time on the stock exchanges. This increased liquidity of investment also makes it easier for the company to attract investors in the future should they need to raise more capital.
-the ability to provide stock options which means that senior managers can be compensated based on the performance of the company and thus handsomely rewarded for good work.
Some of the disadvantages:
-once a company goes public, it is required to be completely transparent in its dealings and requires maintaining a very high standard of disclosure of relevant information. This flow of information enables outsiders and potential investors to conduct their own independent analysis of the company and the outcome may not always be favorable.
-the company is subject to oversight and regulation by the Securities and Exchange Commission and any noncompliance with the SEC regulations is subject to severe punishment.
-the IPO process is time-consuming and expensive and may take up to one year while costing the company in excess of $1 million
Tags: initial public offering, Investing, ipo, Stock Market, Stock Market Investing