What does IPO mean? It refers to the process of offering shares of a privately-owned company for sale to the general public. The first time these shares are offered is called IPO. There are various reasons as to why a company wants to go for IPO, where the more common ones as follows:-
1. Fund raising
Many times when a private owned company wants to raise funds, the financial institutions will insist on collaterals and guarantees, and therefore, the amounts of funds to raise will be limited to the size of the collateral. In the case of IPO, the funds that can be raised will be determined by the confidence of investors on the company, with regards to the growth potential, management team, governance etc. In an IPO exercise, the fund raising potential is way beyond the amount that the company can raise via financial institutions.
2. Low funding cost
Comparing to funding raising via financial institutions (debt funding), where the cost of financing is high, and there could be requirements to place collaterals and guarantees for the financing, the company may be able to raise funding at a much cheaper rates, and without collaterals through the IPO exercise.
3. Unlock potential of the company
As a private owned company, the value attached to the company is always limited because there is no equivalent open market price for this company. Therefore, by going for IPO, the company will need to go through a series of financial, operational and legal due diligence by third party professionals to uncover the full potential of the company. Once the value is endorsed by these professionals, the company is able to unlock its value many times over that of the privately owned company.
Being a public listed company has advantages over many private owned company, where they can have access to bigger and more attractive business potentials. Also, financial institutions and business partners will see them are more credible. Therefore, once the company goes through a successful IPO, the company is deemed to be a “big boy” in its industry, and being a brand in its own right.
5. Succession planning
There are cases where the founders of the company intends to pass on the business to their next generation, but probably unsure if the next generation has interest in their business. Therefore, they would bring the company IPO, and have their family members holding shares of the company. This gives flexibility to the family members to decide whether to retain the shareholding and take over the management of the business, or to sell of their shares for funds to invest or start their own business ventures.