Earlier this week, we became the first commercial law firm in the UK to float, listing our shares on AIM via a successful initial public offering (IPO). In a post last year (This little piggy went to market…but which one?) we highlighted the different markets available to a company looking to list in the UK but what are the reasons why a company may choose to do this? And are there any potential disadvantages?
On the plus side…
There are various possible advantages to an IPO although the relative influence of them will vary from company to company:
Access to capital: the company will be able to raise finance for future growth, development or acquisitions, or in order to reduce its debt, via a public fundraising.
Valuation: the market will place an independent valuation on the company, establishing an objective market capitalisation and benchmarking the company against its competitors.
Market for shares: moving onto a publicly traded platform will mean there is a ready market for the company’s shares. The company will broaden its shareholder base and existing shareholders will have a valuation for their investment.
Realisation of investment: an IPO can give investors the opportunity to exit from the company and realise their investment by selling all or part of their shareholding. Management shareholders will typically be locked-in and unable to sell for a period after the IPO in order to maintain market confidence in the company.
Facilitate acquisitions: future acquisitions may be easier to achieve where the company is able to offer its own shares as part of the consideration package.
Increased publicity: most IPOs attract additional press coverage and a public listing will improve the status and perceptions of the company as it becomes subject to increased scrutiny and regulation.
Employee participation: a flexible share structure with a liquid market for those shares can facilitate increased employee participation in the company through share schemes, helping to incentivise staff.
On the other hand…
It’s not all rosy, however, and some of the potential disadvantages include:
Increased costs: being a publicly traded company will bring additional professional and advisory fees, as well as the costs of meeting the associated increase in regulation.
Greater regulation: public companies are subject to an increased regulatory burden, from mandatory market rules to recommended investor guidelines. They are also required to disclose more information in order to comply with stricter reporting requirements.
Market fluctuations: a publicly traded company will be affected by fluctuations in the markets, even though these may not directly concern its underlying core business.
Loss of control: some owners or managers may not welcome the loss of control which would come with a disposal of a significant part of the company’s shares. Investors will need to be kept happy and consent may be required for future acquisitions.
Each company will have to consider for itself whether the potential advantages of an IPO outweigh any possible disadvantages.