Advantages of Listing

Introduction

Many entities are established with capital contributed by a small number of investors, who become shareholders. As a business grows, additional capital can come from internally generated profits or commercial bank loans. A entity may also decide to raise capital through the stock market by offering and issuing new shares to the public. This requires the entity “to go public” and list on a stock exchange. Many benefits arise from being a public listed entity.

A number of entities in Fiji already have public shareholders but are not listed on a stock exchange. The benefits of being a public company can be significantly enhanced and realised through listing. This stems mainly from factors such as increase in the marketability and liquidity of shares due to the existence of a ready market for trading the shares; the financial and managerial discipline that listing brings to the entity since it is more closely scrutinized by the market and the prestige and stature of being a listed entity. Investors typically value these factors and are prepared to pay more for them, hence an increase in share price and company value.

It is also a dream of many entities to start their own business, grow the business and eventually make them go public. The preparation for an Initial Public Offering (IPO) requires total commitment on the part of the founder and the management team. They need to look beyond the advantages and glamour, and be fully aware of what it means to be listed. The desire to maximize wealth is what drives companies to go public and list.

Some of the advantages of listing are:

Access to Capital

An entity can raise the money it needs to finance new operations, expand on-going operations, develop the successor to a winning product or pay off debt. Your current shareholders may not be in a position to provide the additional capital currently required. Taking more loans from your financiers may be inappropriate for the entity’s financial position or business plan. In these circumstances your entity could make an offering of new shares to the public to raise the required amount of capital. With public offerings, your entity will enjoy more flexibility in financing, development programs to reduce future debt. It can raise capital by making a public offering of its shares not only once, but several times over its business life. With such flexibility, your entity can go into joint venture and choose partners beyond your present membership. You can restructure membership composition and adopt more profitable business plans and strategies.

Share Value Appreciation

An equally powerful factor is the potential for increase in share price, hence increasing shareholders wealth. Through an Initial Public Offering (IPO), your founding shareholders can sell part of the company to new investors, thereby sharing the business with the public. The added investment should improve the company’s potential for growth hence increasing the entity’s value. Your founding shareholders can make a very good return from the sale of the entity’s shares through an IPO.

Reduce Financial Risk

Most entities turn to bank borrowings when they require additional capital as this is a familiar method of accessing money. However, it must be remembered that increasing levels of debt often results in higher effective interest rates. Thus growing burden of debt also imposes additional financial risk on the business, especially in times of poor earnings. Regular interest and principal payments must be maintained, irrespective of the company’s performance. It is also common for banks to require personal guarantees of the founding shareholders and to impose other restrictive covenants on the entity, the hidden costs of which are often ignored by the shareholders. By going to the stock market, your entity has the opportunity to fine-tune its capital structure. The “optimal” capital structure will vary from industry to industry and within each industry. Different capital requirements and earnings prospects will enable each entity to develop the “optimal capital structure” for its business.

Control

Your founding shareholders may fear losing control of the entity when you list it and quote its shares on the stock exchange. However, while an IPO will result in the founding shareholdings owning a lower percentage of the shares than before, so long as they retain 51% of the company’s voting shares they remain in absolute control. You will see that the listing rules of the SPX require a lesser percentage of a entity’s capital to be in the hands of the public (i.e. currently only 20%).

Costs
There are certain costs involved in going public and listing. Some of these costs are one-off while others are ongoing. One-off costs relate largely to undertaking the public offering and include legal fees, accounting fees, investment adviser’s fees, under-writing fees, promotion, costs, registration fees and printing costs. Management will also need to spend considerable time planning for the event. If the offering is to be underwritten, the single largest cost will probably be the underwriter’s commission. This varies depending on the underwriting agreements between the entity and its investment adviser. The cost of a compliance listing (i.e. listing without a public offering) is likely to be very cost effective for the company. On-going costs relate to meeting the on-going disclosure and reporting requirements of the market including publishing annual reports and maintaining the company’s share register.

Improved Corporate Reputation & Increased Visibility

An improved profile that would enhance relations with stakeholders such as bankers and suppliers. A vast base of shareholders can effectively become brand ambassadors for the company creating more goodwill.

Investment Marked to Market
Allows for an objective and fair valuation for the founders and existing shareholders while improving the entity’s ability to attract more institutional investors.

Succession Planning
Founders of the entity who wish to exit the business can transition this through attracting strategic partners and/or institutions through listing.

Employee Commitment
Enables the entity to offer share option incentives which increases the ability to attract and retain high quality talent.

Better Disclosure
Prompts the entity to improve its reporting availing better information for decision making, both internally and externally. It also achieves high level of corporate governance that helps improve the entity’s profile.

Improved Performance
The discipline that comes with being a listed entity generally helps the Board and Management of a company to exercise their responsibilities in ways that benefit the entity and its owners.

Increased Liquidity

Allows shareholders to realise the value of their investments through buying and selling of the shares on a public trading platform.