Public Companies

Written by: Ivan Luigi E. Anenias, Micah G. Halamani, Akira D. Honra, Pierre L. Saldajeno, Darwin Ray L. Tuazon, Justin Philip S. Tuazon

Disclaimer: Please note that this is intended for informational purposes only. This should not be used as financial advice.

Before businesses even worry about profiting from their products and services, one of their first problems is knowing where to get the funding to begin with. Entrepreneurs can choose from a wide range of options, which are generally classified through debt (such as loans from banks or other creditors) or equity financing (referring to the infusion of capital from partners and different forms of investors). Both sources of capital have their advantages and limitations, and management has to determine which source can help them sustain their business in the long run (but that would be another story).

However, the world’s companies at present incur gigantic costs that even amount to the billions. The current scale of their operations makes it difficult to acquire all the resources they need from only a few individuals or entities. Moreover, these businesses are expected to have a high impact on the growth of the economy and the promotion of the general public’s interest through its activities. It is for these reasons that publicly traded companies, through the help of regulatory institutions, exist.

What are public companies?

Publicly traded companies, also called as public companies, are corporations that have stocks or shares that are traded on markets or public exchanges. Public companies are able to generate capital by selling their stocks on stock exchanges. On the other hand, shares of private companies (i.e., companies whose shares are not traded on stock exchanges) are held and traded by a relatively small number of private investors. These companies primarily get their capital from venture capitalists and other similar private institutions. Moreover, public companies, as opposed to private companies, are generally required to disclose certain financial information and documents to the public.

Anyone can purchase shares of a public company on the market, and so, a public company’s ownership is divided among the general public who own a share in the company. Investors who own stocks of a company can also freely trade (i.e., buy and sell) such stocks on the market. Public companies must not be confused with publicly-owned or state-owned companies, as public companies, in the context of funding, are not necessarily owned (either partly or wholly) by government(s).

There are many ways for a private company to become a public company. Companies have to follow certain processes in order to go public, some of which will be briefly discussed in the next section. Generally, companies become public companies with the goal of generating capital for the expansion of their businesses. Sometimes, going public can also be used as a way for early investors to exit the company.

How can one know if a company is public? As mentioned before, public companies have stocks that are traded on public exchanges. In other words, such companies are listed on stock exchanges. For example, all public companies in the Philippines are listed on the Philippine Stock Exchange (PSE). Additionally, in the Philippines, various financial reports, published documents, and other pieces of information from public companies are available to the public via PSE Edge, which can be accessed online. Some of the public companies in the Philippines are Ayala Corporation, SM Investments Corporation, JG Summit Holdings, Robinsons Retail Holdings, and Jollibee Foods Corporation.

How do companies go public?

There are few different ways a company can do to “go public”.

• Initial Public Offering (IPO)

The most common route for “going public” is through an initial public offering (IPO). In an IPO, new shares will be created and underwritten by an intermediary, which will then be sold to the public. An IPO is an arduous process which requires firms to adhere to very strict requirements. Typically, the process is executed over a 6-12 month timeline.

First, the firm must prepare for the transition of going public by conducting a readiness assessment to identify any concerns. An investment banker is often employed for this phase to determine objectives, create a timeline and more.

Next is the implementation of the strategies developed from the previous phase. Firms gather all data for registration to the SEC and prepare legal documentations. Once the listing is filed through the SEC, it becomes a waiting game until the SEC approves the IPO plans. During this, however, the SEC allows firms to communicate information about other things such as disclosing factual business updates.

After the firm gets an approval from the SEC and meets the listing requirements for stock exchange, the company can now execute its IPO and offer its new shares to the public. After the offer period, trading can now officially be done starting on the listing date. The IPO is now completed and the firm can now be considered as a public company.

• Direct Listing/Direct Public Offering (DPO)

Another way of going public is through direct listing. In direct listing, a company can bypass the traditional processes done in an IPO. Unlike an IPO, existing shares are not diluted because there are no new shares created. Instead, with a direct listing, the existing (private) shareholders sell some or all of their shares to the public. There are usually no intermediaries and underwriters involved. No new shares are created and depending on the exchange, there may be no lockup period. This low-cost advantage, however, comes with risks that affect the investors such as lack of support, promotions, possibility of options, and the absence of protection from large shareholders against volatile share prices after going public.

• Reverse Merger

Another way to go public is to do a reverse merger, wherein a firm merges with or gets acquired by an already public firm. This normally happens through shell companies or a special purpose acquisition company (SPAC). A shell company or SPAC is a company that goes public without any real business operations. This company then goes through the process of an IPO and uses the capital to merge or acquire an existing private company. The buying company takes over the leadership and continues the operations of the acquired company, which will become its main business. This process is often quicker and cheaper as opposed to an IPO because a company can merge with an existing public company without going through the grueling process of an IPO.

Pros of going public

• Fundraising

Once made public, companies have the ability to raise a large amount of money quickly. This allows them to grow their operations, conduct research, and pay off existing debt.

• Better Valuation

Many successful businesses see their valuations surge when they list on the stock market because it permits them to place a price on public perception about their business.

• Publicity

The company's public awareness will rise because IPOs often generate publicity by introducing their products to a new group of potential clients.

• Employee Recruitment and Retention

Professionals with best talent in their fields are usually found in publicly traded organizations with a high level of visibility. The top managers and creatives want to work for the most well-known companies in their field, as well as the stock options that come with working for a public business. These elements might assist a company in attracting and retaining superior staff.

• Reputation

Stock exchange has minimum listing standards that limit companies to only those who have achieved a specific level of growth and performance. When a firm is listed, all of its stakeholders (including suppliers and employees) begin to regard it more favorably. In addition, listed businesses are thought to be larger and more efficient than unlisted businesses.

Cons of going public

Now that you know the pros of going public, we will now discuss the cons of going public.

• Transparency

Public companies are required to have a higher level of transparency so they must publish their financial and accounting information on a regular basis. They must also publish more detailed information about their activities and performance which can be accessed by anybody.

• Regulation

Public companies have a higher number of rules and regulations that they must adhere to. If a company's stock is publicly traded, it must abide by the norms of the market. There are now additional share capital limits, as well as on pre-emption and dividends rights. It is also important to note that the government, regulatory agencies, and the public will also observe these public companies more closely.

• Control

It is much more difficult to manage who is a shareholder in a public company. As a result, the original owners of the company may lose control of them and experience conflicts. Also, the owners will have to spend more time managing their shareholders’ expectations. In exchange for their investment, institutional shareholders typically expect consultation and adoption of specific policies.

• Expenses

The initial financial commitment of a public company is higher than that of a private company, and the costs might be higher if the requirements are difficult. Some examples of additional costs include compilation of financial reporting documentation and audit fees. If a company's stock is going to be listed on a stock exchange, it will almost always hire legal and investment professionals to assist it and further charges will be incurred in order to receive a listing.

Conclusion

We discussed key characteristics that distinguish publicly traded companies from other forms of businesses, as well as the general procedures of going public through regulatory bodies. Considering all the arguments for or against it, we can now clearly see that investing in these firms entails a higher risk exposure compared to fixed income options. However, it also goes to say that investing in these companies (especially those that now create a high impact on society) can help you reach your goal of financial freedom in no time.

Do you think public companies are worth your risk appetite?

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