Why do companies go public share?

We closed the previous chapter with few very critical questions. One of which – Why did the company decide to file for an IPO, and in general why do companies go public? When a company decides to file for an IPO, invariably the main reason is to raise funds to fuel their Capex requirement. The promoter has 3 advantages by taking his company public.. 1. He is raising funds to meet Capex requirement 2. He is avoiding the need to raise debt which means he does not have to pay finance charges which translates to better profitability 3.Whenever you buy a share of a company, you are in essence taking the same amount of risk as the promoter is taking. Needless to say, the proportion of the risk and its impact will depend on the quantity of shares you hold. Nonetheless, whether you like it or not, when you buy shares you also buy risk. So when the company goes public, the promoter is actually spreading his risk amongst a large group of people. There are other advantages as well in going for an IPO… 1. Provide an exit for early investors - Once the company goes public, the shares of the company start trading publicly. Any existing shareholder of the company – could be promoters, angel investors, venture capitalist, PE funds; can use this opportunity to sell their shares in the open market. By selling their shares, they get an exit on their initial investment in the company. They can also choose to sell their shares in smaller chunks if they wish. 2.Reward employees –Employees working for the company would have shares allotted to them as an incentive. This sort of arrangement between the employee and the company is called the “Employee Stock Option”. The shares are allotted at a discount to the employees. Once the company goes public, the employees stand a chance to see capital appreciation in the shares. Few examples where the employee benefited from ESOP would be Google, Infosys, Twitter, Facebook etc 3.Improve visibility - Going public definitely increases visibility as the company has a status of being publicly held and traded. There is a greater chance of people’s interest in the company, consequently creating a positive impact on its growth. So let’s just build on our fictional business story from the previous chapter a little further and figure out the IPO details of this company. If you recollect, the company requires 200 Crs to fund their capex and the management had decided to fund this partly by internal accrual and partly by filing for an IPO. Do recollect that company still has 16% of authorized capital translating to 800,000 shares which are not allotted. The last valuation of these shares when the PE firm invested in Series B was 64Crs. The company has progressed really well ever since the PE firm has invested and naturally the valuation of these shares would have gone up. For the sake of simplicity, let us assume the company is now valuing the 16% shares anywhere between 125 Crs to 150 Crs. This translates to a per share value, anywhere between Rs.1562 to Rs.1875/-…(125Crs/8lakh). So if the company puts 16% on the block to the public, they are likely to raise anywhere between 125 to 150 Crs. The remainder has to come from internal accruals. So naturally, the more money they raise, better it is for the company.