The reasons for going public and listing shares on an exchange differ from company to company, but often the main reason is the need for capital. A growing company may need an injection of new capital to realize, for example, expansion plans, increased R&D or intensified marketing. A listing gives access to capital.
Going public can serve a number of other purposes, such as:
Salvis Lapiņš, a member of the Management Board of Olainfarm AS, says: “Being listed gives you visibility and publicity – locally, regionally, and internationally. But it also provides you with something called responsibility towards your investors. We have taken that very seriously and significantly improved our corporate governance efforts. We have tried to do our best in investor relations and investors have appreciated that. And as a result we’ve become the most valuable pharmaceutical company in the Baltic region.”
Realization of a company’s commercial potential requires a capital base, which often exceeds the company’s existing capabilities. Listing creates greater access to unlimited capital resources. As the company develops, it can raise further capital through the issue of new shares.
Acquisition of other companies
In connection with takeovers, it may be desirable that the shares of the continuing company are listed on a stock exchange. The continuing company may thus use liquid listed shares as payment, in full or in part, to the shareholders in the ceasing company. Those shareholders will be able to make a more informed assessment of the offer if the values are fixed through a trustworthy marketplace.
A listed company is more attractive to foreign investors. Listing provides more opportunity to form strategic alliances, for example through cross-border shareholdings, by establishing a well-defined price of the company’s shares and improvement of the negotiability of the company’s shares.
Higher public profile
Listing on a public market inevitably means that the business and its activities will attract more interest, thus broadening awareness of the company. Daily market quotations and disclosure requirements mean that the public gains insight into the company. This helps build and sustain interest in the company, its products and services, and attracts qualified staff. On export markets, listing may strengthen the company’s credibility as a future partner. It is easier to do business with a well-known company.
By listing, the company has an opportunity to motivate employees by issuing employee shares at a favorable price. This strengthens motivation and encourages their active participation in the ownership of the company. Employees can continually see the value of their shares on daily market quotations. In addition, listed companies may use warrants, share options and convertible bonds in an incentive program for management.
The owners of a privately held company are given the opportunity to exit and get access to the capital invested in the company.
In family companies, succession often requires a share sale. It may be difficult to attract investors, as the knowledge of family companies is limited. A listing on an exchange gives the owners easy access to potential investors. The shares of a listed company are often priced higher than shares of an unlisted company. Furthermore, most investors focus on listed companies. This increases demand and, consequently, the prices of listed company shares.
Reduced external borrowing
A company can act more freely and make better decisions when it is not burdened with mounting debts. Many companies use the equity market to raise new capital instead of incurring new debt.
A private company is often valued on the basis of its net capital. A listing on an exchange exposes the full market value of the company. This value often exceeds the book value considerably.
A listed company is more visible than an unlisted company. The media constantly follows the developments of listed companies. Efficient electronic information distribution channels can be used for press releases. Daily price information in printed media serves as a constant reminder of developments among listed companies.