Why are investors interested in IPOs? Why would a company go public?
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Why are investors so interested in IPOs?
Given all the cons of going public, why would a company choose to do this?
Investor A purchases stock through an IPO. After 90 days, Investor A sells the stock to Investor B. In which markets did these transactions occur? Why would a company chose to buy stock in the secondary market?
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Solution Summary
In an 850 solution, the response gives a list of multiple reasons for both pros and cons of going public. It is a comprehensive listing and well explained. Next the secondary markets are explained in terms of their desirability.
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- Why are investors so interested in IPOs?
A company usually begins to think about going public when the funding required to meet the demands of business expansion begin to exceed its ability to raise additional private/venture capital funding or debt capacity.
Initial Public Offerings are great if the investors want shareholder liquidity to diversify their wealth. It can also bring cash into the company for expansion. Being public also makes customers feel more comfortable that the company is finally a mature, stable company. It makes it easier to use stock options to attract key employees. They can even use the "funny money" of stock certificates to acquire other companies without cash.
There are some disadvantages too. It puts the investors in the fishbowl. Everything they do becomes public record: salary, strategic alliances, and profit and losses. A lot of time is spent on SEC (Securities and Exchange Commission) reporting regulations, and handholding shareholders. Also, in some cases, the company just hasn't positioned itself to get the best valuation.
- Given all the cons of going public, why would a company choose to do this?
First, let's take a brief look at the cons of IPO:
* IPO Cons:
- Limited liquidity. To ensure investor confidence, business owners are usually unable to sell large amounts of stock in an ...
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