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Why go public? 1.1 Advantages of conducting an IPO J.P. Morgan (Investment Banking) When considering an initial public offering (IPO), a company should evaluate the associated pros and cons, as well as the motivations for going public. This evaluation process is best conducted in conjunction with an investment bank, which can assist the company in working through the salient issues. There are numerous advantages to going public, the most pertinent of which are detailed below. (a) Access to capital The most common reasons for going public are to raise primary capital to provide the company with working capital to fund organic growth, to repay debt or to fund acquisitions. Further direct results include the following: • Once the company is public, it has access to an entirely new, deep and liquid source of capital for any future needs it may have. • Being publicly traded adds equity to the company’s capital-raising toolkit, enabling the company to achieve and maintain an optimal capital structure. • Following the IPO, the company will be able to tap the equity markets via follow-on offerings of primary and/ or secondary shares, or a mix thereof. After the company has been public for one year, it will be eligible to access the equity capital markets on demand via a shelf registration statement. (b) Liquidity event Listing on the NYSE has numerous benefits, not only for the company but also for its shareholders. The IPO can be structured such that existing owners of the company can sell down their position and receive proceeds for their shares. In addition, once the company is public, the existing owners have a public marketplace through which they can monetize their holdings in a straightforward and orderly fashion. (c) Branding event and prestige By listing on the NYSE, the company will receive worldwide media coverage through the financial markets, which provide constant live coverage on publicly traded companies. In addition, research analysts at broker-dealers will begin to write reports on the stock and the company, thus raising the profile of the company. Broader coverage across various sources will likely enhance the company’s visibility, increase its stature with actual and potential customers and suppliers and thus help it grow its market share and competitive position. (d) Public currency for acquisitions Once the company is public, it can use its publicly tradable common stock in whole or in part to acquire other public or private companies in conjunction with, or instead of, raising additional capital. Publicly tradable stock is clearly more attractive to target shareholders than illiquid private company stock. (e) Enhanced benefits for current employees Stock-based compensation incentives align employees’ interests with those of the company. By allowing employees to benefit alongside the company’s financial success, these programs increase productivity and loyalty to the company and serve as a key selling mechanism when attracting top talent. Furthermore, issuing equity-based compensation will allow the company to attract top talent without incurring additional cash expenses. Being a public company provides employees with the ability to monetize the value of their stock-based compensation, whether it is options or restricted stock. 1.2 Potential issues J.P. Morgan (Investment Banking) While there are numerous advantages to going public, there are also a few considerations that the company, its management and shareholders should evaluate prior to embarking on the IPO process. The most successful companies with the smoothest IPO processes are those that fully weigh these considerations before embarking on an IPO and that begin making the necessary preparations months, if not years, beforehand. (a) Loss of privacy and flexibility In order to comply with securities laws, public companies must disclose various forms of potentially sensitive information publicly, which regulatory agencies, as well as competitors, can then access. Private companies can operate without disclosing proprietary information in a public forum. In addition, the focus of research analysts and the investor community on quarterly results and stock price performance may have the effect of constraining the operational flexibility enjoyed by the management of a private company. (b) Regulatory requirements and potential liability Correspondingly, public companies must regularly file various reports with the Securities and Exchange Commission (SEC) and other regulators. In order to comply with disclosure requirements, companies often need to completely revamp or expand their existing documentation policies, which can be costly and time-consuming. In addition, directors and officers are potentially liable for potential misstatements and omissions in the registration statement and in the company’s ongoing reporting under the Securities Exchange Act of 1934 (the Exchange Act). (c) Sarbanes-Oxley The Sarbanes-Oxley Act was passed in 2002 as a reaction to a number of major corporate and accounting scandals, which cost investors billions of dollars and shook public confidence in the nation’s securities markets. SOX set new standards for public companies, including requirements relating to accounting, corporate governance, internal controls and enhanced financial disclosure. SOX compliance can be a time-consuming and costly process for a newly public company. Although the JOBS Act relieves emerging growth companies (EGCs) of the obligation to have their independent auditors provide an attestation on internal controls under Section 404(b), they are still required to put in place internal controls sufficient for management to provide the certifications required by Section 404(a). 10 NYSE IPO Guide
Why go public? (d) Cost and distraction of management time and attention Going public is a relatively expensive process, incurring one-off and ongoing costs for legal counsel, accounting and auditing services, D&O insurance, underwriting fees, printing, as well as for additional personnel to handle expanded reporting, compliance, and investor relations activities. Furthermore, planning and executing an IPO is a time-consuming process that can distract management from the company’s core business. Ongoing public company obligations post-IPO should also be expected to take up significant management time. 1.3 Going public without an offering J.P. Morgan (Investment Banking) It is possible to go public without conducting a simultaneous offering, although this is typically not recommended except in specific factual circumstances. If the company does not conduct a simultaneous offering, its existing shares are listed on the exchange without being placed in the hands of new investors. Two examples of going public without an offering are (a) spin-offs of existing groups or divisions of already public companies and (b) foreign issuers listing American depositary receipts (ADRs) in the United States. (a) Spin-offs A spin-off from an existing company occurs when a public listed company spins off a part of its business into a separate public entity listed on an exchange. Typically, that part can function as a separate, stand-alone business, with characteristics distinct from those of the parent company. In such a transaction, each existing investor in the parent company will receive shares in the spin-off entity pro rata to its ownership in the parent. For example, Investor A, which owns 5% of Parent Company A, will receive 5% of the shares outstanding in SpinCo A. In this transaction, liquidity is generally preserved for the SpinCo, but the investor churn may be considerable. For example, Investor A may own Parent Company A for its other businesses, which still reside in Parent Company A, and have no interest in SpinCo A and quickly dispose of the shares it receives. To this end, it is difficult to control the investor base in a spin-off transaction, whereas during an offering process shares are strategically placed with those investors known to be interested in owning them. (b) Foreign issuers listing ADRs A foreign company that is publicly traded on an international exchange outside the United States can list ADRs on the NYSE without conducting an offering. The stock is tied to the underlying international security and traditionally trades in tandem with that security. While the ADR will give the company incremental exposure to U.S. investors, there are often limitations on certain funds holding ADRs similar to those limitations applying to the holding of international investments, and typically the liquidity and trading of ADRs can suffer when compared to direct listings of the underlying stock. Through a U.S. listing, foreign private issuers (FPIs) can significantly improve their access to the U.S. equity market. During the last decade, demand for foreign equities has grown appreciably among U.S. institutional and individual investors alike. This demand has been driven by a need for enhanced portfolio diversification, which holdings of foreign equities can provide, and a desire to tap into the higher economic growth rates found in many countries outside the United States— emerging markets in particular. ● NYSE IPO Guide 11
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Contributor profiles NYSE IPO Guide
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Contributor profiles (SEC) register
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Contributor profiles The Children
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Contributor profiles KPMG 345 Park
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