Initial Public Offering ("IPO") - Advantages and Challenges

There are many reasons why the owners of the private companies are willing to go through the vigorous IPO exercise to get their company listed in the stock exchange. While monetary gains are mostly the expectations, let us explore the other advantages and disadvantages a public listed company may have:-

Advantages of IPO

1. Better market value:

The valuation of a public listed company is generally higher than a private-owned company. This is because of the readily available company information for the general public to ascertain the value.

2. Improved company image:

Given the right marketing and positioning strategy, the company’s image can improve tremendously once it is public listed, in the area of branding and confidence level to many stakeholders.

3. Human assets:

The company is able to attract and retain its good employees through schemes like share options and career advancements.

4. Acquisition:

A public listed company can use it’s publicly traded shares as payment to acquire other businesses.

5. Collaterals:

The shareholders may pledge their shares to financial institutions as collaterals for certain financing activities, either for the company or personal. The financial institutions are able to accept these shares as collateral because if their nature of being publicly traded.

6. Improved liquidity to the shareholders:

If at any point (after the moratorium period), that the shareholders needed liquidity for their personal purposes, they can easily sell down they shares are the stock exchange.

Challenges

1. Transparency:

Due to the mandatory reporting requirements where extensive information must be disclosed publicly, there could be business sensitive information that will be made available to customers, competitors and employees.

2. Vulnerable to takeovers:

With the shares of the company being publicly traded, the shareholder’s ability to control their ownership on the company is reduced, and being exposed to threats of unsolicited takeovers.

3. Pressure:

There are many performance pressures associated with a public listed company, due to the fact that many information are made public within a very short span of time for the investors to ensure timely decision making. Therefore, it is normal to expect pressure on the sales and financial reporting in all public listed companies as their reporting deadlines are very periodic, ie. quarterly, half-yearly and annually.