Is An IPO Really Necessary For Big Companies?

Frasers Logistics and Industrial Trusts’ $903 million IPO is launching on the 10^th July 2016 at $0.89 per unit, the largest IPO since 2013. Frasers Logistics and Industrial Trusts will also be the largest REIT listed here in Singapore with an all-Australian industrial portfolio.

Most companies start to prepare for an Initial Public Offering (IPO) when they have grown to a certain size with steady profits. This is often done to further the growth of the company. However, is an IPO really necessary for big companies? We look at the both the advantages and disadvantages of listing on the stock exchange as well as the benefits of staying as a private company.

Why List On The Stock Exchange?

#1 Prestige

An IPO represents a milestone for the company. It is associated to a company’s prestige and credibility. This makes the company more attractive to investors and enables the firm to hire more talents to further its growth

#2 Obtain Financing Outside Of Banking System

A listed company is able to raise additional funds through the issuance of stocks. It also helps companies obtain loans with better terms from financial institutions.

#3 Increase Company Awareness

When news of an anticipated IPO emerges, wide press coverage creates hype and gives the company publicity. Only when the public and fund managers truly understand what the company is doing, will they invest in it. If it obtains positive coverage, the firm will be able to trade at better valuations, benefiting its investors and management.

#4 Better Management

With the high level public scrutiny, companies listed on the stock exchange require greater transparency. The management of the public company has to help create value for its shareholders. For investors to invest in a public company, the management team will need to show their credibility, capability and leadership.

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Why A Listing On The Stock Exchange Is Not Necessarily Good

The process of undertaking an IPO is time-consuming, expensive and rigorous. This aspect of working towards and IPO is often overlooked.

Direct costs are incurred when a company goes through the process to be listed. This includes the cost of underwriting, external auditors, financial advisors, legal fees, registration fees etc. Upon listing on the stock exchange, the company also incurs incremental organizational costs.

Listed companies are often valued based on their recent profitability and cash flow. Hence, they try to show higher profits and cash inflows. Listed companies also have to report their financials at least bi-annually or quarterly. Managers’ remuneration structure provides more incentives for them to go for short-term gains over long-term goals. Ultimately, they might be taking on projects that are not beneficial for shareholders in the long run.

Why Remain As A Private Company?

Although there are advantages to being listed on the stock exchange, some big companies such as IKEA, remain private.

Private companies need to practice accurate accounting, but they do not need to disclose important information about their finances to the public. Private companies tend to show lower profitability so that they pay lesser tax. By staying private, these companies are able to avoid the level of scrutiny publicly listed companies are under as there are fewer requirements for reporting.

Private companies do not have the advantage of raising capital from the public that listed companies enjoy. However, private companies can still make up for this with other ways of financing such as through banks. Private companies can also raise capital by offering stock ownership to investors and employees.

Before undergoing the IPO process, management needs to review the readiness of the company as there are many hidden costs to a public listing. Although being listed on the stock exchange brings prestige to a company, an IPO is not always necessary.

Read Also: What Every Newbie Investor Needs To Know About The SGX & STI

Top Image Credit: DollarsAndSense.sg

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