Why and when do companies go public?

Companies that can successfully demonstrate their future growth potential are good candidates for going public. Companies that want to expand their existing business but profits may not be sufficient enough to expand rapidly can decide to go public to raise more money. The money raised by IPO can be invested in new businesses to broaden portfolios (M&A) and to increase production in terms of manufacturing or to pay off old debts and so forth.

When your company goes public you should make sure that it is in healthy financial condition, making profits, having a good reputation, enjoying good corporate governance and having good future prospects. This is to make sure that your company could attract investors to place a higher valuation on your company which leads to increase in their share price which in turn increases the net worth of majority shareholders.

Good companies always can attract the attention of big financial institutions, lenders, PE, venture capitalist, banks, hedge funds and so forth. So not only there's an increase in the value of your company but getting a loan is relatively easy and venture capitalists want their shares to sell to the public as high as possible thus increasing the valuation of your company. Simply said that going public allows your company to raise large amounts of money from stock market investors.

Sometimes the excitement among the public of privately held company going public is so huge that the company's valuation gets over exaggerated and making shareholders quite rich. Going public involves offering the company's shares for sale to the public through a listing on a stock exchange.

Below are some proven advantages and disadvantages of a company to go public:

Advantages of Going Public

1. Going public increases your company value and reputation. This axiom holds true on the condition that your company has established good corporate governance and sustained good reputation in doing business profitably.

2. Going public affords higher access to capital. It is easier to raise capital for a public company due to the confidence it instills in investors. Unlike bank loans, the capital raised from going public or IPO does not need to be repaid. It is your net worth!.

3. Stocks can be used in lieu of cash to make acquisitions. A public company can use their stock as currency to perform various transactions including acquisitions of other new companies as part of the corporate development strategy (M&A).

4. Stocks are a tool for recruitment and retention of executives and other employees. Stock options can be offered as bonuses and compensation and give executives a monetary incentive to succeed and work harder to help grow the business profitably.

5. The additional stock offering can be made if the first stock offering is successful and share price steps us as your company will have more confidence to conduct the second offering.

6. Stocks offer increased liquidity and a clear exit strategy for investors. Many investors prefer public companies due to the greater liquidity and ease of divesting.

7. Going public affords greater credibility and prestige in the business community. Becoming a public company builds confidence due to the fact they are successful enough to make the leap and successfully verifiable from many regulatory aspects.

8. Going public creates heightened public exposure and brand awareness. The process of going public affords a degree of free publicity to that company and their products or services. This gets your products and services effectively promoted to a larger number of customers.

Disadvantages of Going Public

1. Equity Dilution. Going public is the process of selling ownership of a part of your company to strangers or public at large. Every bit of ownership that you sell comes out of a current owner's equity position. It is not always possible to raise the amount of money that you may need to operate a public corporation and still keep at least 51 percent of the company's ownership in your own hands.

2. Loss of Management Control. Once your corporation goes public, management becomes more complicated. You can no longer make decisions autonomously. Even if you are a majority shareholder, the minority shareholders have a say in how the company is managed. Also, you will no longer have total control over the composition of the board of directors, as in Indonesia the corporation law places restrictions on board composition to ensure the independence of the board from insider influence.

3. Enhanced Reporting Requirements.A private corporation can keep its internal business information private. A public corporation, however, must make extensive quarterly and annual disclosures about business operations, financial condition, compensation of directors and officers and other internal matters. It loses most privacy rights as a consequence of allowing the public to invest in its stock.

4. Increased Regulatory Oversight. Going public places your company under the supervision of the BAPEPAM, or BEJ or OJK that regulate public corporations, as well as the stock exchange that has agreed to list the company's stock. This increase in regulatory oversight significantly changes the way you can manage the business.

5. Increased Liability. Taking your company public increases the potential liability of the company and its officers and directors for mismanagement. By law, a public corporation has an obligation to its shareholders to maximize shareholder profits and disclose operational information. The corporation and its management can be sued for self-dealing, making material misrepresentations to shareholders or omitting information that the local securities laws require being disclosed.

One important thing to bear in mind, going public is an expensive and time-consuming process. A corporation must put its affairs in order and prepare reports and disclosures that comply with Indonesian Securities and Exchange regulations regarding initial public offerings. Not only will you have to mobilize your resources and exercise more efforts to accomplish this work, you will have to hire specialists to take the company through the process, including attorneys, asset valuation experts, auditors, advisors, accountants, and underwriters.

Finally, the degree of your responsibility for sustaining the company’s good corporate governance and its reputation in doing business becomes higher and higher once it has become public. Failing to do so will likely result in the dilution of share value of the company that may force you to buy back the shares to reduce their number on the market and if this does not help then there will be little you can further do about it but sadly opt for the worst scenario, that is, to delist the company from the stock market. Such failures should be avoided as it would impact on your company’s reputation at all.

Thank you,

Herpiani Ng