Why Companies Go Public With Initial Public Offerings
The main motivation in any company going public is of course going to be money. However, it isn't just to raise one lump sum of cash. IPOs can be beneficial in the following ways as well:
Paying Down Debt
If a company has an IPO and it currently owes a large amount of money to a debtor, they may be able to pay that debtor in stock. This saves the company a good deal of interest and pays down the debt that the company has on their books.
Upgrade and Expansion
With part of the money raised with the IPO of a company, many upgrades can be made. While a private company may not have the immediate funds available for things like new equipment or new facilities for expansion, an IPO quickly remedies that problem.
Exit Strategy
With many companies there are those who are in it for the long haul and there are those who initially gave money to help "seed" the company. These initial investors are often only in it for the return on their investment and want out as quickly as possible. One of the best returns they could receive would be from the company they seeded going public. Most of these types of investors will insist that a company have an exit strategy in place before an investment is actually made.
Capital is Good
If there is one thing that any company can always use more of it is capital. Having capital means that you have the money to make the moves necessary for your company's success. In the business world, there is little else that can compare to the capital raising opportunity of an IPO and as long as there is a need for capital, there will be a need for IPOs.
Sources: Ed Grabianowski, HowStuffWorks "How IPOs Work", HowStuffWorks.com
Investopedia, IPO Basics: What is an IPO?, Investopedia.com
Published by Jimmy Collins - Featured Contributor in Business & Finance
Full time freelance writer. I am a former stock broker and money manager who still loves all aspects of finance as well as sports and fitness. Currently I hold a 4th degree black belt in the Martial Art of T... View profile
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3 Comments
Post a CommentI'm going to say what's already been said by both Laura and Michele--great job explaining what IPO is (I'd never thought much of the term, but now understand that it is much weightier than I imagined). I'll be looking at information concerning IPOs with much more understanding thanks to this article. Well done, Jimmy!
Thanks for the explanation of IPOs. I never really understood the methodology. cheers )
very helpful story!