The Pros and Cons of being a public company.
Pros:
Efficient Access to capital markets:
Cheaper then PE or VC (as they ask for decision-making positions), do not need to return stock capital, access to debt markets- bonds, notes, structured products and through various other securities.
Liquidity/exit strategy:
Liquidity to investors; promoters, employees so that they can exit.
Stock as currency:
Stock of a public company could be used as currency to make acquisitions, write options to incentivize employees, contractors and other stakeholders.
Stock as collateral:
Investors may use the stock as collateral to take out loans.
Stock provides diversification benefit at lower cost:
Investors receive diversification benefit at a lower cost, as the cost of trading public equity is very low due to better marketibility. Otherwise they may need the special expertise of an investment banker to help hedge their risk, which could certainly cost huge bps.
Valuations:
The public markets provide an irrefutable valuation for the company, the company may lever itself to improve valuations. Public traded equity is better priced than privately held equity.
Prestige & better monetary value of goodwill:
Public companies have a better image in the mind of the general public, creditors, suppliers, investors, etc. This enables buildup of goodwill, which has monetary value and generally gets reflected in the valuations. Prestigue also serves as a non-monetary employee motivation tool.
Transperancy:
Public release of financials, events, announcements etc ensures trasperancy which builds confidence in the minds of all stakeholders.
Cons:
Loss of freedom for management / slower response:
Management, in some cases, may require approval from board of directors, large shareholders, or group of shareholders. This may lead to delay in decision-making, which could delay the responsiveness of the company to changes in its external environment.
Myopic outlook:
As shareholders increasingly look for quarterly performance, the management may lose sight of the long-term objective and may get expensively focused on short-term goals
Expensive paper work:
A public company has to comply to various other additional regulations, by one estimate after sarbanes-oxley act the cost to a small business could be greater than $5m. Ongoing reporting and fulfilling regulatory disclosures.
Risk takeovers/ loss of control:
Management may loose control of the company if a group of investors obtain majority control.
Release of sensative information:
Financial disclosures and various other announcemets also lead to loss of secret competitative information, as compensation to top management, new forays, new ventures, business strategies, cost structure, etc.
Occupies management time:
Substantial management time is devoted meeting regulatory requirements, meeting investors, preparing for conference calls, earnings calls.
Cost of upgradation of management and accounting systems and increased auditing cost:
Increases the cost to the company on an ongoing basis, its not a one time charge!
