Owning and operating profitable businesses is one of the best-kept secrets to creating wealth. But the greatest value accretion and wealth accumulation occurs in the ownership of growing, public companies. While downside risks exist for most public companies, the upside potential and opportunity for both founders and investors remain a greater compelling drive to move from private to the public markets.
The reasons for being public can vary by company, but the opportunity available to public companies make going public a good strategy for many a long-standing business owner and his/her company.
Prestige and Recognition
Public corporations offer value accretion in several key ways. First, public companies receive much more press coverage than their private competitors. Second, full disclosure makes it more motivating and trusting for other business and government entities to do business with the public firm. Finally, public companies are valued at much higher multiples than their private counterparts–for many of the reasons mentioned above. This value accretion is beneficial to both founders and investors alike. This is perhaps one of the greatest benefits of going public, especially when investors are looking for a liquid exit.
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Raising Capital & Investor Exit
The lifeblood of business is access to capital. Investors often need a bit of additional motivation to ensure they can receive at least some portion of their initial investment returned. When private business owners decide to take a company public, the investors are able to sell their shares on the open market to whomever they please. Private company illiquidity and the eventual promise of a merger or acquisition for an overpriced multiple to a Fortune 500 are no longer needed.
In most cases, a public offering combines a capital raising event with the opportunity for investors to sell into the flurry of buying activity. Equity and convertible debt holders can receive public company value accretion once their shares begin trading on the open market. With the right market maker promoting the stock, the company’s original investors are likely to receive principal plus a nice solid return. And, if the deal is structured right, the company can raise a significant amount of capital.
Mergers & Acquisitions
Rapid inorganic growth is best accomplished through industry consolidation via strategic mergers and acquisitions. Strategic mergers with public companies are often best facilitated by using some combination of both stock and cash. Performing an industry roll-up in this manner ensures cash liquidity is maintained throughout the process and adds even greater value to the bottom-line of the business as each privately-held acquisition is added to the public company–with immediate value accretion of course.
Being a public company certainly has its downsides, but the upside of public valuation accretion, the ability to use public stock for M&A and the opportunity to offer an exit strategy for investors are all prime motivating factors for taking a private company to the public markets. Assessing whether such a strategy is right is a decision not to be rushed or taken lightly.
