Latin American Capital Markets

402 HANNESTAKACS AND KINGA KORCSMAROSTable 12-5 | Advantages and Disadvantages of Going PublicAdvantagesGreater access to capital. An initial public offeringprovides a certain amount of immediate capitalthat can be utilized for many purposes, such asfixed assets, working capital, research and development,and repayment of existing debts.Increased market value. Due to their liquidity,available information, and ascertained value, publiccompanies tend to be more valuable than privatecompanies.Exit strategy. Liquidity and greater shareholdervalue may be achieved subject to certain restrictions.Shareholders may sell their stock in thepublic market over time; existing stock may alsobe used as collateral.Equity advantages. An IPO results in an immediateincrease in the company's net worth and facilitatesfinancing due to an improved debt-equity ratio.Enhanced reputation, prestige, and public image.Public companies receive more and broader attentionand with time acceptance from the investmentcommunity and customers.Ability to attract and keep key personnel. Flexibilityof employee ownership and participation.Less dilution. If conditions permit, the companymay achieve a better price and less dilution incomparison to other forms of equity financing.Opportunities for mergers and acquisitions. Goingpublic may raise a lot of cash for acquisitions butalso create liquidity that can be used to buy othercompaniesDisadvantagesOne-time and ongoing expenses. There are manysignificant expenses in connection with an IPOand later on in connection with administrative andreporting requirements.Volatility. The company's value is more affected bythe state of the economy and the stock market.Pressure for short-term performance.The managementof a public company is under constant pressureto balance short-term demands with strategiesthat achieve long-term goals; if the company doesnot meet the expectations of analysts with regardto short-term earnings, it can seriously hurt thecompany's long-term valuation on the marketSharing of financial success with shareholders.Loss of privacy. A public company immediatelybecomes subject to periodic reporting; sensitiveareas of disclosure are available to competitors, customers,and employees, such as compensationof officers and directors and the security holdingsof officers, directors, and major shareholders.Dilution of control. If more than 50 percent of thecompany's shares are sold to just a few outsideindividuals, the original owners could lose controlof the company.Compliance with complex regulations.Risk If an IPO is unsuccessful, the company mustbear the costs.Copyright © by the Inter-American Development Bank. All rights reserved.For more information visit our website: www.iadb.org/pub