Why do companies go public?

Question

I don’t have a finance or business background and would like to know why companies go public? What does go public even mean? Is there some advantage to it? The last one I read about was Facebook going public and their stock price went down hard immediately. It was all over the news, but I never know what it supposed to mean? If such a big company like Facebook would go through something that terrible, there must be a reason for it. So why do companies take the trouble to go public?

Answer 1

To understand why companies will “go public,” we need to understand what “going public” means first. “Going public” means that a company could offer securities for sale to the general public and receive a spot in the stock exchange listings. The process known as an initial public offering, or IPO, is the company first sale of stock. With the sale comes money. Indeed, it is one way to gain capital to expand a company. It allows a company to expand their source of financing, outside of borrowing from banks and sometimes to reduce their debt. If you are a small start-up company, going big might be a huge problem since their shareholders or investors might not want to provide them with the funding. Since they are a new business and all, banks will be less willing to lend you the money at a good rate. The company, however, would need to disclose all their financial information in order to go public. Investors and analysts would then buy the shares if they find the potential to grow in the company. Essentially, going public create more means for a smaller company to gain capital to expand.

Answer 2

Company awareness is raised as it went public. Call it free advertising of a sort, private companies that decide to go public usually are already doing decently in the market. Their IPO could create hype and attract tons of attention from all the investors and the press, more than what the company marketing itself could afford.

It is also about the prestige. By being the center of the attention, the company would try it’s best to gain favors among the people. They want them to raise fund for them, to believe that they would grow. For the general public too, say if a company that is going public is selling hair product, the free extra exposure in the news would certainly increase the product awareness, increasing sales and profits alike. Every company knows how important marketing is, pretty much why the pharmaceutical industry spends much more on marketing than the actual drug itself. Going public could literally mean introducing the company to the public. 

Answer 3

Going public provides liquidity to the shareholders, the investors could easily exchange the stocks purchased for cash. This liquidity increases the price of the stocks in comparison to staying as private, the stocks are freely traded, investors are willing to pay more for the extra liquidity and thus more money for the company. The initial “valuation” might put the company in the better standing, with higher estimated price if the company is doing superbly well as private. I believe this is the main reason why do companies go public.

However, in the case of Facebook, its initial stock price was overestimated, due to greed as usual, and immediately plunging the price down as people do have access to all the information of how well the company’s “going public” is doing. Facebook was facing some issue with advertising income, only priced higher due to all the hype surrounding it, of course with the analysts wanting to cash in on the craze. That didn’t go well for them, although Facebook climbed back to its initial estimated price years later.

Answer 4

Every company dreams of being a company that is huge enough so that it will be acquired by another bigger company. The thing about an acquisition is that big companies take over the small companies and expand it further, but now with a new brand name and leader, small companies lose that individuality.

While, in one way, it provides tons of funding, on the other hand, they lose their individuality as the independent company. If they, the small companies, believe that they have a strong market presence, they could instead try for an IPO and earn that funding themselves, growing without the help and intervention of another bigger senior. Future success as an independent will raise the price of stock even further than it in an acquisition. So, why do companies go public? Because that opportunity gives the underdogs the confidence that one day they will be one of the giants.