If you think initial public offerings are only for big businesses, think again!
Some companies go through an IPO to:
Of course, there are costs associated with doing an IPO, both financial and in terms of the time and effort required. And never forget that "being public" means being held to a level of accountability far and above that to which privately owned firms are held.
Companies often seek to "list" on a stock exchange for the primary reason of raising capital for expansion, or investing in new business projects or ventures. Often also, institutions list their securities and bonds on an exchange for ease of trade.
It is the dream of many entities to start their own business, grow the business and eventually bring them public. However, a public listing should not be the natural progression once your company has grown to a certain size or profit level. The preparation for an initial public offering (IPO) requires total commitment on the part of the founder and his management team. They need to look beyond the advantages and glamour, and be fully aware of what it means to be listed.
This intends to give you an overview of the listing process and some key areas to take note of in embarking on the road to an IPO.
The “Why” – Pros and Cons of Being Listed
An entity has to weigh up the pros and cons of listing in light of the company’s plans and goals. Early discussions with professional advisors, consultants, accountants and lawyers can provide the entity with more specific consideration and perspective.
What does it mean to be listed?
Once listed, the first transformation a company goes through is from being a private company to a Public Company. This means that the company is no longer owned by a close knit group of Investors and Entrepreneurs, it becomes widely owned by a number of investors that owns its shares known as shareholders. Just as with a proprietary company, once a company becomes public, it has the equivalent responsibilities to disclose key activities and results of the company to each and every individual shareholder.
- 1. Ease of raising funds for expansion
- The traditional means of financing for most SMEs is bank borrowings. An IPO provides an alternative to relying on bank funding and frees the business from fixed repayment commitment. Once listed, dividends due to shareholders, if any, are declared at the discretion of management and the company and as such is not subject to any fixed repayment terms.
- 2. Enhanced liquidity of company’s shares
- Investors may buy or sell shares of a listed company in the open market. The founder as such can take advantage of this by selling his shares in the open market
- 3. Ability to conduct mergers and acquisition (M&A) activities using the company’s shares as consideration
- Due to the enhanced liquidity of a listed company’s shares, the company is able to use its shares in place of cash as consideration for the acquisition of a potential target company. Similarly, the market value of the company could form the basis of a valuation of the company should the owner decide to sell their stake in the company or alternatively merge the company with another.
- 4. Enhance image and status of the company
- A listed company is generally seen to be more prestigious, stable and financially viable than a private company, having passed the scrutiny of regulators in its listing attempt. Certain companies, especially SMEs, as a result may get given priority in awarding contracts due to their listed status. A listing in this instance thus opens doors to more opportunities for a company.
- 5. Ability to attract and retain good staff and professional managers
- The enhanced image and the liquidity of the company’s shares mean that a listed company is able to implement an Employee Stock Option Plan (ESOP) to attract and retain good staff and professional managers. In an ESOP, staff are awarded options which are convertible to shares in the company. The employees will be motivated to work for and align their interests with the company in effecting an improved share price performance.
Apart from the initial IPO costs, the cons are principally related to the way the business will be conducted after a listing:
- 1. Less flexibility or more bureaucracy in making major decisions
- The main adjustment that an owner would have to make is the significant loss of autonomy in running the business of the listed company. Major decisions are to be made having regard to the interest of public shareholders, which would probably require shareholder approval. Operationally, Related-Party transactions, i.e. business dealings between the listed company and other companies controlled by the directors, CEO, or controlling shareholders (and the associates of such persons) would similarly require shareholder approval. Shareholders of the company would also need to be mindful of the accumulation of shares in the company as there may be take-over implications
- 2. Increased compliance costs
- A listed company is expected to comply with various regulations, especially in relation to accounting and disclosure requirements. This implies more management time, effort, and compliance costs for the company post listing.
- 3. Higher expectation on disclosure of information and accountability to public shareholders
- A board of directors (BOD) comprising executive, non-executive and independent directors needs to be appointed for a listed company. The BOD acts as the guardian and protector of public shareholder’s interests to ensure that the company is well-managed and that shareholder’s interests are not compromised.
- 4. Risk of being take-over targets
- Every listed company is susceptible to takeover raids. Ironically, the more well-run and cash-rich a company is, the more susceptible it is to being a take-over target. With the dilution of control from a public listing, the founder runs the risk of his listed company being bought to the extent of the percentage of shares not owned by him. He would then have to contend with other shareholders who may be less than cooperative.
- 5. Increased pressure for short-term performance
- With public listing come closer scrutiny from stock analysts and market players who directly or indirectly drive the share price performance, demand continual good financial performance, and expect dividend pay-outs. At the expense of long term growth and development of the company, the entity may be pressured to deliver short-term profits or results that underpin the share price performance.
- 6. Commitment to investor relationship management
- Investor relationship management is crucial in communication to the market of the financial performance and decisions of the company. However, investor relationship management also demands more management time and effort from the company’s perspective.
- 7. Subject to general stockmarket fluctuations
- Generally, investors tend to react in a similar fashion to changing market conditions. As a result, company’s share price can also move as a result of overall change in market conditions rather than company specific conditions.
For more information on SWITCHING to the SSX, please refer to the flyer below:
ARE YOU READY TO LIST?
It is necessary to examine a range of factors in order to gauge whether your entity is prepared for listing. Some of the issues you would want to consider include:
What are your organisation’s long-term goals and strategies?
- Are there skill gaps at the senior management and board level?
- How will these be resolved in a listed environment?
- Are directors and senior managers prepared for greater disclosure, accountability and transparency after listing?
- Is your organisation’s culture ready for listing?
- Are there tax issues to be resolved?
- Are strategies in place to retain key employees and key customers?
- What initiatives (e.g. acquisitions) need to be completed before listing?
- Are your operational, financial and management information systems sufficiently robust for a listed organisation?
- Have you taken account of corporate governance best practice?
- Is the timing right for a listing, in terms both of the business and of market conditions?
- Do you understand what investors and the market expect and require from you?
Answers to these questions would be a good indicator of how ready you are to embark on the journey to a publicly-listed company.
Your organisation must also meet specific requirements set out in the SSX's Listing Standards in order to be qualified for listing.
The requirement includes a set of minimum entry standards which you can find in the HOW TO LIST section.