Why do companies decide to join Philippine Stocks Exchange? What are the benefits of going public that other businesses don’t have?
I will try to answer what motivates companies from staying as a private establishment to becoming a public, whose stocks can be bought by just anybody in the stock market.
First things first, what is a public company?
A public company is a business whose stocks are traded in the Philippine Stocks Exchange. That means, the Filipino people can buy their stocks.
A public company is different from a private company in many ways. For one, it has to follow the rules of the Securities and Exchange Commission (SEC), which are a lot more than if it has stayed as a private corporation. This is done so that SEC can make sure that it stays honest in conducting its business, especially now that it is requesting or has already received funding from ordinary Pinoy investors.
Two, it is also required to present to the public regular updates about its business. Updates may include its current finances, gains or losses, whether it has sold or bought huge assets and others significant decisions that may have impact on its business.
There are still other important changes that it has to do. Which would then led me to answer the question I asked at the start: why is it worth taking the trouble?
Here are the benefits of a public company.
1. It wants to raise capital.
One of the reasons companies go through all the hassle is to be able to raise capital to fund their ambitious plans.
Say for example that a T-shirt company decides to edge out its competition by hiring talented designers, hiring skilled workers and acquiring state-of-the-art equipment. In order to do that, it has to have money.
Now, let’s say that it has the option to borrow from a bank. But with the huge capital that’s needed, the bank may not be able to finance the deal. Alternatively, the bank may give it a go but only after imposing higher fees and/or asking the business to follow certain conditions.
Only by letting a big number of people with spare cash to join in the enterprise can the t-shirt company be able to get the capital it needs.
2. It decides to go big.
Let’s go back to the t-shirt company. Say that it also wants to expand its business and engage in producing shoes, sportswear, bags and accessories. Not only that, it wants to put up branches in many locations. These are plans that can only be achieved through careful planning and huge sums of money.
3. It can build brand.
It is always news when a company does an initial public offering (IPO). It is covered by business news and reported in earnest anticipation even weeks before it takes place.
It is a chance for the company to ride on the awareness by building its brand. Through word-of-mouth and news coverage, it can be introduced into new segments of population and in the process it can expand its market, opening its doors to new customers.
Going back to the T-shirt company, it can use the opportunity of being in the news to go on active marketing campaigns that further fuel interest.
4. It allows the first investors to realize their worth.
The very first investors who helped start the business will find that they will be able to gain from a company going public. This is because the market response to initial offering is essentially a litmus test on how people trust the brand.
When interest in the company is high that it drives demand of the stocks, the prices go up. The investors who were responsible in financing the first few years of operation of the business can then realize their gains due to the valuation of the stocks that they hold.
5. It helps the economy.
Maybe, I should say that this is not top of the list of reasons. Rather, this is more on the effect of having a new business enter PSE.
Any IPO is met with thundering applause, I mean most of them. There is a refreshed vigor and excitement in the market that positively affect the entire economy.
Looking at it from a bird’s eye-view, it is an opportunity for the government to allow the efficient use and allocation of money. Spare cash of investors that would have been otherwise deposited in savings bank account can actually be spent for a business to increase its productivity.
In turn, the investing public can participate in earning passive income through potential returns.
In the past, in fact, there are IPO’s that have simulated a rather sluggish market to a bullish one. They became light at the end of the tunnel that drive the rest to hold faith and trust in the market again.