Initial Public Offer (IPO) is when a company’s shares are offered to the public for the first time. Companies go for an IPO to raise money for many reasons. For example, to fund business operations as an exit strategy for existing investors, increase company visibility and branding, etc. The reason may be anything, but the bigger picture behind going for an IPO is achieving greater heights and making the business more successful. The article covers why do companies launch an IPO in detail.
1. Raising Capital for Business
One of the most common reasons why companies go for an IPO is to raise capital for business. Raising capital can be for expanding business operations, investing in research, paying off debts, infrastructure development, etc. The motive is to have some capital that will help in future developments. The greater the capital, the greater the likelihood of corporate expansion.
2. Liquidity for Private Equity Investors
Numerous stakeholders, such as the company’s founders or private investors, hold shares in a variety of private enterprises. If the existing investors wish to partially or entirely liquidate their interest, listing on a stock exchange can provide a solution. Through an Offer for Sale (OFS), the company’s current shareholders can sell their shares to the public. Thus, current stockholders can liquidate their holding through IPO listing.
3. Liquidity for Employees
Employees of private corporations may have limited liquidity to sell their stock options. The expectation is that employees who remain with the company will eventually reap the rewards, possibly through a future IPO. Numerous unlisted companies coordinate their exercise time with their initial public offering (IPO) so that their employees can exercise their options and gain rapid liquidity.
4. Improves Financial Position
The sale of a company’s shares to the public will produce significant liquidity and capital, which may be utilized to improve the company’s future. Consequently, the company will be in a more stable financial position to request loans or negotiate loan terms.
5. Liquidity and Marketability
When a company’s shares are listed on a stock exchange, they are easily tradable. The stock exchange is a place to purchase and sell securities. Thus, listing a company’s shares permits the company to participate in this trading activity. Therefore, the shares become easily marketable and liquid, encouraging investors to acquire a part in the company.
6. Price Transparency
The listing of the stocks will offer substantial liquidity. Furthermore, it will result in the company’s financial stability and also boost price transparency.
7. Mergers and Acquisition
A well-managed company is frequently a target for mergers or acquisitions by large corporations. Additionally, companies use IPO proceeds to fund mergers. A successful IPO provides a company with value, reputation, status, and additional finances for funding any merger and acquisition deals.
8. Credibility and Branding
Through an IPO, a company’s visibility and credibility may grow. Furthermore, with SEBI’s strict regulation and periodic reporting procedures, the financial data is readily available to everyone. Thus, offering more transparency.