Problems Companies Face with going Public: A firm by firm approach
Stock markets are complex, to say the least. This applies in particular when a business is venturing into them for the first time. The difficulties that enterprises face in their development stage could to some seem easier than the pressures that come along with having company stock under a ticker and watching them fluctuate throughout the day- every weekday. Major shareholders could close a day on a celebratory note then wake up the following morning to find their shares’ value plummeting. However, before experiencing these hardships, firms are faced with one of the most difficult tasks of all – going public successfully. We analyze the problems that most firms have to expect and work through in a bid to be listed on the stock exchange. Here they are below.
- Publicity for the company’s stock
For investors to buy a firm’s shares, they must know that the particular enterprise exists. Further, companies seeking to go public must give these investors credible information concerning the business in such a way that they are convinced of its growth potential. However, how corporations inform potential investors about the sale of their shares is to a major extent overseen by the Securities Exchange Commission. This means that firms have to abide by the terms and conditions set by the commission lest their offering gets canceled for the time-being. This could further hurt company prospects to go public in the future as investors would be uneasy about buying shares in a firm that was in the past on the wrong side of the law.
On the other hand, the company could successfully use its publicity to spur demand and fund a successful IPO. Snap Inc., for example, rode on the popularity of its social media app Snapchat so as to sell shares at a high price. The fact that so many people knew Snapchat consequently caused Snap Inc.’s shares to rise steeply after the IPO. Other firms, such as AppDynamics, have been acquired before their IPO as a result of the good delivery company owners practiced while marketing their issuance. Spotify’s going public without an official IPO could help it gather more publicity since its marketing is not under SEC regulations.
- Accurate Share Price Ranges
In the process of staging its initial public offering, a company involves financial institutions who then manage the process of putting up the firm on trading floors. These organizations are referred to as underwriters, and play the key role of pricing the company’s stock. Employees working under the underwriter make calculations based on the firm’s valuation and determine the number of shares being sold and the range of cost for each of the stock’s units. Miscalculations in this context could be detrimental to the company’s success. If the price is considered to be too high by investors, then there will be weak demand for the firm’s stock and the corporation might not sell the number of shares it targets to during its offering.
If, however, the firm sells its shares at a lower than expected price, it denies the company the chance to raise more revenue than it could have by selling the stock. This means that the enterprise collects lesser income from the issuance- a situation commonly called ‘leaving money on the table.’
Facebook, for example, priced its shares at $38, above the expected range of $28 – $35. As a result, the firm’s stock dropped by over 50 percent in the next few months. It only traded above its issuance price a year later. More recently, MuleSoft’s shares were considered underpriced following its 45 percent surge on its first trading day. The low price denied the firm a chance to amass more revenue from its issuance.