If you run a growing, dynamic company you may be considering an initial public offering (more commonly known as an “IPO” or a “listing”) for your company i.e. floating your company on the stock market.
This is the first of a three part series about IPOs. The first summarises the advantages and disadvantages of doing an IPO. The second outlines which of the several UK markets you could consider. The third is perhaps the most important as it gives some guidance about what you should be aware of before you start.
1.1 Access to capital
A listing brings with it the opportunity for the company to issue shares for money, both at the time of the initial listing and in the future. The amounts that can be raised on an IPO can sometimes be significant. A listing will mean that there are more shareholders in the company, including institutional shareholders such as pension funds.
Having more shareholders should make it easier to raise further funds in the future, such as by undertaking a rights issue, where existing shareholders are offered the opportunity to buy more shares.
It also gives existing shareholders an opportunity to realise some (but usually not all) of their investment in the company.
1.2 Providing a market for the company’s shares
A listing should make the company’s shares more marketable because there will then be a forum on which the company’s shares can be traded. Before a listing takes place it may be difficult for a shareholder in an unlisted company to sell his shares. However, after a listing an investor who wishes to buy shares in the company will know how to do so.
Directors and/or significant shareholders may be required to be “locked-in” at the time of the IPO, because a director selling his shares is usually perceived as not being consistent with asking outside parties to invest.
A listing will provide venture capitalists and owner managers with an exit route once any “lock-in” period has expired.
1.3 Ability to use shares to make acquisitions
If an unlisted company offers to buy another company using shares in itself to satisfy the purchase price, the seller is unlikely to accept because it will be very difficult for the seller to sell those consideration shares and receive cash.
However, because there is a market on which shares of a quoted company can be sold, a seller may accept shares from a listed buyer. This will enable the cash of the listed buyer to be used for other purposes.
1.4 Raising profile and better perception
A listing will improve the perception of a company's financial stability and transparency.
There will also be an increased public awareness of the company through greater press coverage.
In addition, the fact that a company has undergone the rigorous due diligence required to obtain a listing may help reassure customers and suppliers as to the company’s financial standing, thus allowing the company to negotiate better commercial terms.
1.5 Employee commitment
The public market in the shares may encourage employee participation in the ownership of the company through employee share ownership schemes, giving the shares a visible value and employees a liquid market on which to trade their shares.
This should in turn help recruitment and tie in and incentivise key staff.
1.6 Comparison against competitors
When a company is listed on the same exchange as its competitors in the same sector, investors can compare the company's value and performance against those competitors.
Existing shareholders should recognise from the outset that their percentage interest in the company will be diluted. However, one would hope that the benefits of listing will increase the overall value of the company. In other words, existing shareholders will have a smaller share of a bigger pie and so the value of their holding should increase, even if they have a smaller percentage of the company.
2.2 What goes up…
The value of a listed company can be adversely affected by market conditions beyond its control and so it is possible that a company’s value may go down, at least in the short term.
2.3 Risk of takeovers
Because the shares in the company will be freely transferable it is possible that institutional shareholders may wish to sell their shares to a potential bidder.
If the holding of those institutional shareholders is large enough, their acceptance of an offer under the UK Takeover Code may succeed.
Fladgate is an advanced, commercially astute international law firm serving a wide range of corporate, institutional and private clients.
We are experts in assisting companies in raising new equity, either through admission to the London Stock Exchange’s (LSE) Main Market, the AIM Market (AIM) or through a dual quotation if the company is already listed overseas.
With a significant proportion of our clients being fast-growing and entrepreneurial businesses, we have developed wide-ranging experience of AIM and are regularly ranked by the independent legal directories as one of the leading law firms for AIM-related matters. We act for both domestic and overseas companies, as well as for nominated advisers and brokers on a range of flotations, reverse takeovers and secondary fundraisings across multiple sectors.
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