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Corporate Finance : flotation |
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Listing any company, whether on AIM or on the Official List, is a major strategic decision involving a process which can be lengthy, complex and expensive. So why do companies choose to go public?
Reasons for going public
- To raise equity finance either through the initial listing or through further issues thereafter.
- To establish a market in the company's shares and a more readily ascertainable price for the shares.
- To finance expansion through the issue of the company's shares as consideration in the acquisition of other businesses.
- To incentivise existing employees, for example by facilitating the introduction of employee share schemes.
- To enhance the profile and image of the company.
- To strengthen the company's systems, group structure and management team. To be accurate, this tends to be a result rather than the initial aim but can be viewed as a long term benefit.
Is it as good as is seems? Here are some of the most commonly agreed or perceived disadvantages of flotation:
Disadvantages of going public
- Institutional shareholder pressure upon dividends and short-term profitability.
- The need to comply with on-going Stock Exchange and other regulatory requirements.
- The possible loss of control to new shareholders or to a predator.
- The loss of control and flexibility over directors' remuneration.
- Restrictions on the ability of the directors to sell shares after the flotation.
- Increased public exposure of the company and its activities.
The questions to be faced at the relevant time if contemplating admission to the Official List will include:
- Does the company have, as its main activity, an independent business that has been under common senior management for at least three years?
- Will the company have at least 25% of the shares in the hands of the public?
- Is the company looking for a quotation too soon or does it have an erratic or poor profit record?
- Is there both quality and depth to the management team?
- Has the company the right range and breadth of products and customers, a business with market appeal and an expectation of growth?
- Does the company have suitable systems of internal control?
Admission to AIM is less onerous, with no requirement for a three year trading record, no need to place 25% of the shares in public hands and no continuity of management necessary. There are a number of other reduced requirements although, with the AIM market as well known for some spectacular failures as for its success stories, sponsors will look increasingly closely at any company's suitability and will regard more favourably those companies which elect voluntarily to meet more stringent requirements. Moreover, although an AIM listing is generally cheaper than a full listing, it should not necessarily be thought of as a cheap alternative.
For further information contact our experts, or click for further information about acquiring or selling a business or raising finance.
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