Undertaking an IPO is a transformative step, requiring a critical analysis and appreciation of both the advantages and disadvantages of the IPO process and life as a publicly listed company. A successful IPO will allow a company to be listed on the Australian Securities Exchange (ASX), but it will be up to the management team and board of directors to take advantage of the opportunities afforded to the company’s newly listed status.
An IPO can offer several benefits and opportunities, including access to capital, an increase in shareholder value, succession planning, greater transparency of management and business operations, as well as enhance your company’s corporate profile.
Access to capital
An IPO requires the raising of funds from the public. Money raised under a share offering is equity and unlike debt, does not have to be repaid. These funds are able to be used for further growth, acceleration of exploration or mining development plans, acquisitions and retiring debt - thus resulting in an improvement to the company’s financial position and performance.
Once listed, subsequent capital raisings are generally more efficient and less expensive, as the company can tap into the larger pool of public capital and take advantage of the reduced capital raising disclosure requirements of a listed entity. Subsequent capital raisings are also generally undertaken based on a higher valuation for the company, as listed companies often trade on a higher multiple of earnings (or price earnings ratio) than their private counterparts. Any capital raising based on higher valuations will result in less dilution of existing shareholders interest than a private equity raising.
Increase in shareholder value
An IPO may result in a substantial increase in equity value of the company’s shares. As a general principle, listed shares trade on higher multiples than private entities due to:
- the ability to trade listed shares on a recognised exchange - private shares, on the other hand are relatively illiquid and as a consequence are difficult to trade;
- market perception of a listed entity generally infers some improvement or sustainability in their financial, management and business capabilities;
- as a consequence of its improved financial position and enhanced status, a listed company is able to attract and retain experienced and skilled board members and other executive officers; and
- the market price of listed shares is based on all available information. ASX requires (under the ASX’s continuous disclosure regime) for each listed company to provide the market with all information that may be material to its share price, resulting in a more orderly and transparent market for trading of securities.
Succession planning
Going public can be a useful strategy for the founding stakeholders to realise value and potentially divest their interest where there is no obvious successor. A listed company’s securities are publicly traded enabling any future sale of shares where a shareholder elects to sell down, or where there has been a death of a shareholder.
IPOs that have demonstrated a track record of financial performance (and related ASX Listing Rule financial criteria) are entitled to make a secondary offering (shares owned by founding and other existing shareholders), in addition to a primary offering (by way of issue of shares).
Greater transparency and efficiency
Going public results in greater disclosure and market scrutiny of the management and business operations of the company, which may lead to enhanced executive accountability to the board and in turn, an increase in management and operating efficiency.
Enhanced corporate profile
A company listing on a recognised exchange (such as the ASX) will generally result in increased media coverage, as well as improved corporate perception by its competitors, customers, clients, government agencies and the public generally. If the listed company reaches a certain size, it may be featured in various financial analyst reports, which can assist in the marketing of the company, as well as an increase in public knowledge and an increase in the demand for the company's shares.
Life as a public company – considerations
Life as a listed public company has consequences and continuing obligations that should be considered. These include a potential loss of founder control, managing shareholders’ expectations, market risk and increased director responsibility and scrutiny. While there may be drawbacks to listing a company, in many cases, the impact of these drawbacks can be mitigated through careful planning supported by the advice of specialist advisors.