Companies should go public

Why companies should go public and list on the capital market writes Robert Mathu

Why companies should go public and list on the capital market writes Robert Mathu

The capital market is a place for businesses to raise capital to finance their investment projects. When companies raise capital publicly, they are required to list their securities (shares or bonds) on a stock exchange. The requirement that a company has to list and have their securities traded has some fundamental implications.

Firstly, the shares or bonds on the capital market, provides an exit window to shareholders. The prospect for listing is viewed by shareholders as an added advantage for being able to sell their shares whenever they decide. It provides them with the comfort that there will be a market for the products they are being.

Secondly, since the issuer (the company) is required to disclose information about their business, the public takes an assurance that there will be fairness through transparency in the matters affecting their company.

Thirdly, the company itself is assured of accessing any future capital needs from the same public. When a company raises capital publicly or seeks a listing for the first time, it goes through transformation. This comes in the form of adopting new culture or a different way of doing business.

The idea or decision to go public comes from the shareholders of a company where they pass a resolution to open up the company to the public by allowing them to participate as shareholders. The decision is usually inevitably strategic. It means the company or the business acquires a new profile called public. This profile comes with expectations from all the stakeholders. These include the shareholders, management of the company, the customers, suppliers, competitors and other public institutions that interact with the business.

The challenges of going public could be a one off task. The task is the transformation or change of culture. This starts with the company adopting the initial stock market requirements on disclosure of information and the minimum management and corporate governance structures. There are of course the additional costs involved in maintaining a listing but these are far outweighed by the benefits.

When raising capital for the first time, a company clearly sends a message of expectations and prospects for growth and profitability. Equally the company will expect to benefit from the ease of access to capital from the same public. This is clearly demonstrated by companies in almost all sectors of businesses.

In the life of a company’s listing, the more it performs well and keeps the investors happy, the more it makes it easy to raise capital. The shareholders and investors would normally vote with their cash by paying high prices for the shares of the company when happy and selling off at lower prices whenever they are disappointed.

Financial institutions, especially the banks and insurance companies, need the capital market may be more than other businesses. These institutions operate in an environment where their levels of capital are regulated. The minimum capital for banks and insurance companies must keep growing and whenever there is a call for more, the capital market comes in handy. In addition, business growth and expansion needs will always require a company to strengthen their capital base.

Listing on the capital market provides companies with several options for raising capital. Companies could issue additional new shares to the public whenever they need to raise more capital. Other options for listed companies would include the sale of new shares only to existing shareholders commonly referred to as a rights issue, or a company could convert part of their accumulated reserves from retained profits into capital by issuing bonus shares to the existing shareholders.

For some listed companies, expansion of market share or entry into new markets is done through acquisitions, mergers and takeovers. Again such corporate actions require that companies have the ability to raise capital with speed. Here, the shares of a listed company could be used as a currency to make an acquisition or to defend one.

The flexibility that comes with a listing of a company on the capital market is significant to a business. In many economies, most of the large companies with leading or substantial market share are listed in their local stock exchanges or even cross listed in more than one capital market. Equally, small or fairly new businesses have used the capital market to raise funds for expansion and have lived to tell success stories.

Most businesses are created to live forever as long as they make profit and pay their obligations. The owners of businesses always hope see their legacy’s live beyond several generations. This is usually very challenging for family owned and managed businesses. Succession plans are not commonly put in place by the first owners of the business. Sometime successive generations of family members lack interest and when the owner dies, the business follows him or her. Again for a company that is listed, it is very easy to transfer ownership to new shareholders and this way, companies are guaranteed existence way beyond the first owners. Always at market value.

Robert Mathu is the Executive Director of Capital Markets Advisory Council (CMAC)

 

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