A lot of privately owned companies go public at some point. But what does it mean to go “public”? What are the reasons why they do it? Is it only to generate money? In this article, we are going to learn about the 5 reasons why companies go public.
The Initial Public Offering
Companies going “public” undergo an IPO or an Initial Public Offering. An IPO is the first time that the stock of a previously private company is offered to the public for sale. The established shares of the company are listed on an exchange and then sold to public investors. The amount of capital that is raised is usually fixed, and the proceeds may either go directly to the company or to existing shareholders, like the founders or original investors. This process is usually done by companies seeking to generate capital in order to expand or to become traded publicly.
Common reasons for going public
Generate cash – The most obvious reason for an IPO is to generate cash. A typical IPO may raise an amount of $100 million to $150 million, depending on the quality of the company. There are also some cases wherein an IPO generates up to $5 billion. This money is used by the firm for expansion, creating innovating products, and for making important business-growing acquisitions. There are also times wherein a part or even all the cash go to the existing shareholders.
Increase publicity – Going public can also help with indirectly advertising the company. An IPO means that the company would be listed on public exchanges, which could help in promoting the brand to other people by increasing its exposure. It can also indicate that the company is healthy enough to be included in such exchanges.
Raise market value – If the owners of a publicly traded company decide to sell it at some point, the market value of the company is determined by looking at its traits. A company’s worth is more than just its cash flow and cash holdings. Some other factors include its fund liquidity, all its assets, and whether all of these information is available to the public. Based on statistics, publicly owned companies are valued about 17 times their usual earnings, which is 12 times more than those which are privately owned.
Attract talents – A lot of publicly traded companies use stock and stock options programs in order to attract potential employees. These incentives help companies to entice high-quality personnel and make them competitive employers as well due to the perks in addition to the usual salary offered.
Alternative currency – The stocks of a publicly traded company are easy to convert into its cash value. Because of this, companies may sometimes use them as a form of currency when buying or merging with other companies.
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