Many owners and managers of former private companies say that before embarking on the flotation process they were aware that the main advantages of a listing were access to capital and to provide a market for the Company shares. The most prominent draw back was the continuing obligations placed on a quoted company. However, having been through the process, the spread of pros and cons is both broader and much more complex.
Let’s first look at the reasons for going public.
Access to capital growth It brings the opportunity to raise equity finance at the initial listing and through subsequent capital raisings. It gives companies the chance to grow by raising funds from one of the world’s deepest pools of capital. Companies of all kinds are attracted to list in London by its deep liquidity, widespread equity culture and sophisticated investment community.
Providing a market for the company’s shares. The creation of a public market at an externally agreed price stimulates liquidity in the company’s shares and enables shareholders to realise the value of their holdings (and existing investors to exit if they so choose either at flotation or at a later stage), and can help broaden the company’s shareholder base.
Employee commitment. It encourages employee participation in the ownership of the company through employee share schemes, as the schemes have a visible value and a market for trading. This in turn helps recruit and retain (with a long-term commitment to the business) highly sort after employees and officers.
Acquisition opportunities. Greater access to capital and the ability to issue paper with a market value as an acquisition currency can increase the potential to make acquisitions of private or quoted companies.
Public profile. The business and its activities will receive more extensive coverage in the press and may receive coverage in analysts reports, hence widening the awareness of the company and its products / services. This can help sustain the demand for, and the liquidity in, the company’s shares.
Customers and suppliers. Companies coming on to the Stock Exchange may find that the perception of their financial strength within their own industry is transformed. This is particularly relevant to a smaller company dealing with much larger customers. These larger customers may be reassured that the company has received regulatory approval and has undergone a rigorous due diligence process. This perceived higher financial standing might enable the quoted company to conduct business on better commercial terms since the perceived risk of default to the outsider is lower.
Greater efficiency. The requirement for more rigorous disclosure tends to lend itself to better systems and controls, improved management information, and greater operating efficiency for the business as a whole. The overriding reason for going public is of course the ability to raise capital when sources of finance which have taken the business this far (eg banks, shareholders or venture capitalists) are now unable or unwilling to further invest. This may be because of market conditions generally or specific market conditions applicable to the sector concerned, may be because of changes in investment trends or may be simply because the size of the investment needed to be too big.
However, let's now try and balance the argument by looking at the reasons for staying private.
Market condition. The price and liquidity of a company’s shares are affected by market conditions beyond its control. A quoted company may find that its shares suffer from illiquidity or that its share price is adversely (or even positively) affected by market rumour, economic developments or events elsewhere in the same sector.
Loss of control. The sale of equity in the company inevitably involves surrendering a degree of management control to the outside shareholders whose views must be taken into account by the board in the operation of the company’s business. For instance certain corporate actions such as significant acquisitions are only possible with the prior approval of shareholders. In addition, the need to satisfy shareholders requirement for a return on their investment on a continuing basis can lead to the company feeling pressured to aim for short-term performance rather than long-term strategic goals. Depending on the proportion of the equity that remains in directors’ hands, the company may also run the risk of being taken over by an unwelcome acquirer at some point in the future.
Disclosure and reporting. The quoted company will be involved in a much higher degree of ongoing disclosure and reporting than that of a private company. This may require additional investment in terms of management information systems and a more rigorous application of compliance control.
Loss of privacy. The greater accountability to outside shareholders inevitably means that the directors lose much of the privacy and autonomy they may have enjoyed when running a private company. In addition, with the increase in profile any under performance receives a greater degree of coverage that may have a direct impact on the share price. The higher degree of interest, which the press takes in a listed company, can be a benefit in good times, but may be much less welcome when things are not going so well.
Costs and Fees. For a relatively small company the overall costs involved in listing, raising additional capital and the ongoing costs of maintaining a listing can be significant and may outweigh the benefits. A full listing on the main market is likely to cost at least £500,000.
Management Time. The listing itself and the continuing obligations use up significant amounts of management time, which might otherwise be directed to running the business.
Director’s responsibilities and restrictions. Directors of a private company may find that they simply do not like the implications of running a quoted business. Greater disclosure of salaries, restrictions on share dealing and price-sensitive information, and the need to invest time and money in investor relations are all additional burdens, which are unlikely to arise with a private company.
As one managing director of a manufacturing company once explained “When you are considering a listing, you should make the decision backwards. You look at where you will be after the flotation, and compare it with where you are now. You are going to spend hundreds of thousands and possibly millions of pounds in fees, and if you are not sure what benefits you are buying for that money, then there is definitely something wrong”.
