In September 2014, a 15-year old company made history’s largest entry into the stock market: Alibaba raised $25 billion on the New York Stock Exchange just two years after Facebook’s $16 billion IPO. Tereza Tykvova, Professor of Corporate Finance at the University of Hohenheim in Stuttgart, reviews the advantages and risks of the stock market.
Technologist: Why list a company on the stock market?
Tereza Tykvova: To make money, plain and simple. Founders and business angels make money selling their shares, and the company can raise money to finance new projects. It will then be in a better position to buy other companies with shares, as Facebook did with Whatsapp.
T. Are there other advantages?
T. T. A company listed on a stock exchange has to be more transparent. This reassures banks, which will then lend money on more favourable terms. Listing on the stock exchange is also a marketing boon, especially for little-known companies that can benefit from media coverage. This makes it easier to attract new investors, qualified employees, partner companies, suppliers and clients.
T. Any downsides?
T. T. It’s very expensive –both in services (investment banking, audit, accounting) and stock market fees. The process takes several months during which management might neglect the rest of the company. You have to undergo stringent scrutiny and publish complete financials and information on strategy, which become available to the competition. Finally, there’s the risk of focusing too much on short-term returns to please investors, while sacrificing in areas like R&D.
T. What’s the best time for an IPO?
T. T. Most often it’s during the growth phase, when you start making money and need a significant injection of capital to finance further development.
T. Which stock exchange should you choose?
T. T. Listing in the U.S. is more expensive, particularly for small companies. The Sarbanes-Oxley law imposes very stringent controls, and investment-banking fees can be twice as expensive as in Europe. But you also need to consider where your client base is located.
T. How can you ensure a successful listing?
T. T. You need to prepare carefully. But you also need to tell a convincing story.