An initial public offering (IPO) occurs when a company sells its first stock. Small companies that are seeking further growth make use of the IPO to generate the required capital and to expand. Further expansion can be highly beneficial to a company and would come with several advantages. However, there are potential disadvantages that could arise when a company decides to go public.
Advantages of public trading
The main advantage of publicly traded equity financing comes in the form of raising capital. The capital raised can be used advance company ventures such as fund capital expenditure, research and development (R&D), and even pay off its debt.
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Another advantage of trading a company publicly is having an increased awareness of a company. IPOs usually generate publicity by making their products become known to a new group of potential buyers. This will help the company increase its sales.
An IPO can be advantageous to individuals that started a company as it serves as an exit strategy. Venture capitalists use IPO to create successful companies and gain huge loads of cash since they helped the company start-up.
Disadvantages of publicly trading
Publicly trading a company will often come with several changes to a company’s operations some of which could be disadvantageous. One change that could be challenging for a company is the need for additional disclosures for its investors. Publicly traded companies are usually regulated by the Securities Exchange Act and have to carry out periodic financial reporting. They have to additionally meet other rules and regulations that have been stipulated by the Securities and Exchange Commission (SEC) (Sundarasen et al., 2017).
Publicly trading comes with additional costs that could be very high for small companies. The costs come about because a company has to comply with the regulatory requirements. These additional costs would include generating financing reporting documents, investor relation departments, and audit fees.
Publicly traded companies can experience additional pressures from the market which can affect its business operations. For instance, the company may have to focus on achieving short-term results and forget about long-term growth. The company’s management may also come under greater scrutiny since investors are looking for opportunities to make profits.
Publicly Traded Sporting Companies
Examples of publicly traded companies include Nike and Under Armour. Nike Inc. is publicly traded in the New York Stock Exchange under the acronym NKE. The company went public in the year 2004 and has since seen an increase in its dividend rate. It has a high strength in the sports business and commits to increasing shareholder value for its stockholders ("NIKE, Inc. Stock Information", 2018). Nike is a global leader and provider for sports equipment, footwear, apparel, and other accessory products. The company is a world-recognized brand and has had sponsorships with high-profile athletes over the past years.
Under Armour, Inc. is publicly traded in the New York Stock Exchange under the acronym UAA. The company markets and distributes branded sporting apparel. Under Armour had its initial public offering on November 2015 and was able to raise $153 million of capital. The company was able to progress was able to amass $281 million in revenue ten years after the launch ("Investor Relations - Under Armour, Inc.", 2018).
In conclusion, while the initial public offering comes with disadvantages, the benefits outweigh the challenges. Taking a sports company public will be a wise decision because it comes with increased capital, increased awareness, and potential profits for the company starter. However, the company should be mindful of the costs required to trade publicly and should be able to adjust its business operations accordingly. From the case study, Nike and Under Armour chose to be traded publicly and have since amassed huge profits due to increased revenues and increased awareness.
References
Investor Relations - Under Armour, Inc. (2018). Retrieved from http://investor.underarmour.com/stock-information
NIKE, Inc. - Investor Relations - Investors - Stock Information. (2018). Retrieved from https://investors.nike.com/investors/stock-information/?toggle=dividends
Sundarasen, S., Goel, S., & Zulaini, F. A. (2017). Impact of investors’ protection, transparency level and legal origin on initial public offering (IPO) initial returns. Managerial Finance , 43 (7), 738-760.
