Why do Companies Go Public

There’s no better time for an investor or trader to get the shares of a company than when it goes public. When a company goes public, a lot happens. During this time, the company’s owners and founders surrender some control to the public. But while they’re undeniably trendy, as a retail trader or investor, you need to understand the underdealings in the IPOs to know how to position yourself.

What Does ‘Go Public’ Mean?

In the context of investing, ‘Go Public’ means offering shares to the public. It typically happens in the stock exchange through an initial public offering (IPO).

In the UK, most companies consider listing on the London Stock Exchange (LSE). But, some other UK-regulated or MTF markets exist, including the AQSE Growth Market and Cboe Europe Equities. Since the LSE dominates the market, we assume the listing will happen there.

An IPO allows a limited company to become a PLC by making its stock available to retail traders and investors. The stock is listed on an exchange, included in indices, and publicly traded.

Buying IPO shares is risky compared to shares of well-established companies. The IPO price depends on predicted demand; other factors later influence the trading price.

IPO Process

An IPO is an exciting, stressful, and often complex process for owners and founders. But given its strategic importance, it deserves every ounce of attention.

The FCA governs the steps companies must take to “go public.” Management plans carefully and ensures a smooth IPO process, which starts as early as two years before the date. The company decides the number of shares it offers to the public but works with valuers to determine an initial share price.

A company considering listing in London must choose the right market. The LSE has two main markets for IPOs: the Main Market and AIM. The Main Market is the flagship market and a ‘UK regulated market’ under UK MiFIR. All listed equity shares must trade on UK-regulated markets, so companies doing an IPO must apply for admission to the FCA’s Official List and trade on the Main Market.

AIM is excellent for smaller or growth companies not officially listed. Its less strict and suitable for early-stage companies. Unlike the Main Market, which requires at least 10%, AIM has no formal minimum free float requirement. It operates as a Multilateral Trading Facility (MTF) and is a UK SME Growth Market, with moderate regulations.

Here is the path a company follows to go public:

1. The Decision to Go Public

The first step is deciding to go public and why the company is considering it. Concrete reasons must drive this decision, and the company needs to be ready, and this means having:

• A successful business with a focused strategy
• A track record of positive financial performance
• Favorable financial prospects
• An experienced management team
• Strong financial, operational, and compliance controls

The company will then decide on its listing based on its size, the amount it seeks to raise through the IPO, its business nature, and the demand for its shares.

2. Assembling the Team

Going public is not a one-party affair; it involves many critical players. Preparatory work includes due diligence, prospectus preparation, and other documentation. The company engages in consultancy or appoints a team of advisors.

It will need lawyers to coordinate the legal work, verification, and documentation. Accountants review finances and working capital and report on financial history. It’s here also that the company appoints an investment bank to manage the IPO process.

The investment bank works with the company to determine an approximate share price. It is also the sponsor, book runner, underwriter, broker, and PR consultant. The bank publicizes the IPO to attract market interest in the company.

The consultants also develop the timetable of events and coordinate the preparation of the necessary documents. The UK regulatory body, the Financial Conduct Authority (FCA), is consulted throughout the process.

The governance structure is finalized, including decisions about the new board. During this period, presentations are made to analysts. An IPO on the primary market usually takes at least 6 months, while AIM listings can be faster.

3. Public Phase

The prospectus, required by the LSE, includes financial information, reasons for the IPO, and details about the offer. The UK Listing Authority reviews and approves this document, which is used to market the IPO.

In the final phase, the company publishes the registration documents and announces the expected Intention To Float (ITF). This is after the order book closes, and a board meeting has been held to approve the final share price based on orders received. The final prospectus or AIM admission document is submitted. Formal applications for listing and admission follow it before trading begins.

The marketing exercise, led by the book runner, involves contacting investors and holding roadshows to spark interest.

4. The IPO

On the IPO day, the investors who expressed interest and subscribed to the IPO get priority. They receive their shares from the underwriter before the market opens. But these investors can’t trade these shares until the lock-up period is over, upon which the shares trade like any other stock. 

Afterwards, the shares start trading on the open market, usually on the same day as the primary market. So, retail traders and investors can buy or sell shares freely through stockbrokers. 

Sometimes, shares enter the ‘conditional trading’ phase for about three days. During this time, share purchases have deferred settlement. Once unconditional trading starts, shares can trade freely.

Six Reasons for Going Public

Companies pursue IPOs to raise money for various reasons, including to:

1. Expand operations
2. Fund research
3. Pay off debt
4. Offer liquidity for private investors and employees
5. Improve the company’s financial position to make it easier to secure loans
6. Generate significant publicity and boost a company’s image

Final Thoughts

The main goal of going public is to help a business grow and succeed. Afterwards, it is easier and cheaper for the company to raise capital. But it comes at a price. The company must file quarterly and annual reports, answer to shareholders, and report activities like executive stock trading or selling assets. For traders and investors, a company going public is an opportunity to own a stake. However, IPOs are risky investments with inconsistent long-term returns. That’s it. Interested in IPOs? Choose a broker here and be part of the next big company going public.