Small companies looking to further the growth of their company often use an IPO as a way to generate the capital needed to expand. Although further expansion is a benefit to the company, there are both pros and cons that arise when a company goes public. As such there is a need to evaluate the factors Starhill REIT took into consideration before issuing their IPO. The factors, that is, the advantages and disadvantages are listed and described below: PROS Less Need to Borrow
According to investopedia, Public companies, those whose shares are available for purchase on stock exchanges, can fund major initiatives such as expanding into new markets and entering new product lines by issuing common stock. Capital can also be used to fund research and development, fund capital expenditure or even used to pay off existing debt. So IPO is a way for Starhill to obtain money that they do not have to repay. Anonymous investors who purchase the stock are not considered as lenders; they are much rather considered as the companies co-investors.
Stock as Currency and Public Awareness Tool The “International Journal of Business” states that when public companies expand by issuing IPO they can use their stock in the future to acquire other businesses, they can use their own stock as part of the purchase price. This method ties the owners of the acquired entities to the buyer, in this case Starhill, and brings them on board in a meaningful way. Similarly, they can use their own stock as collateral for secured loans.
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Another pro is an increased public awareness of the company because IPOs often generate publicity by making their products known to a new group of potential investors, be it individuals or institutional investors the company places itself at an advantage. Stock Options After companies have undergone their initial public offering, they can use stock options in various ways: as employee stock options, which are issued as non-cash compensation for deserving employees, and to outsiders — consultants, attorneys and others — for services rendered.
If the stock price rises, the option holders enjoy a direct benefit. Stock options are commonly used during a company’s startup phase to save cash and later as part of senior executives’ ongoing compensation packages. Potential customers Going public is often an outward sign of credibility solid reputation and achievement as stated by investopedia. This tends to pay off not only with the investing public but also with bankers, industry participants and customers. Because a public offering will increase Starhill’s net worth, they should find it possible to borrow funds in the future on more favorable terms.
Banks, which are also considered as potential investors use the company’s debt-to-equity ratio as an indicator of loan risk; most bankers prefer that total debt never exceed the net worth of the company. Diversification of risk When owners of a company decide to offer IPO of their company it is also a way of diversifying the risk that they used to bare alone. New investors also take on some of the risk the company may face in the future. And current owners of the Starhill REIT may have new capital which they may use to acquire stock from other public companies to expand their portfolios and minimize their risk.
