Assignment: Chapter 18 - Initial Public Offerings, Investment Banking, and Financial Restructuring Back to Assignment more. Attempts: 34 4 Keep the Highest: 4/4 Attention: Due to a bug in Google Chrome, this page may not function correctly. Click here to learn 2. Advantages and disadvantages of IPOs An initial public offering (IPO) refers to the first sale of a company's stock to the public through the stock market. Once a company launches its IPO, it changes from a privately held company to a publicly traded company, Visa, AT&T, Kraft Foods, UPS, CIT Group, Conoco, The Blackstone Group, Travelers, Goldman Sachs, and Agere Systems are among the firms considered to have issued the largest IPOs in U.S. history, each selling for more than $3.5 billion. These companies, along with thousands of other companies whose stock trades in equity markets across the globe, reap the benefits of going public. The following table describes some advantages and disadvantages of going public in the United States. Identify whether each description is an advantage or a disadvantage of going public from the perspective of a company and its owners. Advantage Disadvantage Description Managers of a publicly traded company cannot easily engage in self-dealings or use company funds for expensive perks. A publicly traded company generally receives more visibility, which helps the firm access more potential markets. Many CFOs of newly public firms report that they invest considerable time talking with investors and analysts. Companies can raise capital through equity markets once the company goes public. There are several advantages and disadvantages of going public. Some advantages are as follows: Increases liquidity: Once a company goes public, its stock can be traded easily among buyers and sellers. The stock becomes more liquid, and company stakeholders can sell their equity stake in the company. Helps founders to diversify: Company founders usually have most of their portfolio funds invested in the company itself. Once a company goes public, company founders can easily sell their stake in the company and diversify their investments, reducing the risk of their personal portfolios. Facilitates new corporate cash: After they use angel capital, venture funding, and/or private equity funding, companies still might need additional capital for various reasons. A publicly traded company can raise new capital from the equity markets by selling the company's stock. Establishes a market value for the firm: Once a company goes public, its shares are traded among buyers and sellers at a certain market price. Using the market price, the number of shares outstanding, and the debt in the company, investors, finance professionals, and regulators can establish the firm's value. This value is used for several purposes, including ESOPs (Employee Stock Ownership Plans), estate tax purposes, and others. Facilitates merger negotiations: A publicly traded company has a market price of its stock at any given time. This market price puts a value on the company's stock, which can be used in merger negotiations. Increases potential markets: A publicly traded company generally receives more visibility than a private firm. This increases the firm's brand value, and helps the company access more potential domestic and international markets. Some of the disadvantages of going public are as follows: Reporting costs: A public company must report its quarterly and annual earnings and ensure that these reports comply with the Sarbanes-Oxley Act and SEC regulations. This can be costly and use a lot of company resources. Disclosure: A publicly traded company is required to disclose its operating data, financial information, and share ownership. These data are publicly accessible to everyone, including competitors. The net worth of company officers, directors, and founders can also be estimated based on the number of shares owned. Self-dealings and consumption of perks: The owners of a publicly held company are its shareholders. Because managers are answerable to owners of the company, self-dealings and consuming expensive perks using company funds can be more difficult Control: Managers of a publicly traded company have to work harder to maintain control over the firm, due to the possibility of proxy fights and tender offers. Inactive market and/or low price: If a company's stock is trading at low prices and/or low trade volume, analysts and stockbrokers don't pay much attention and don't follow the stock. This does not make the stock more liquid, and stock may not be traded at its true value. Investor relations: Investors and analysts need to be kept up to date about the company's financial condition, which uses a lot of resources. Many CFOs of newly public firms report that they invest considerable time in talking with investors and analysts