Private versus Public Debate: Is Initial Public Offering (IPO) A Boon or Bane?

In contemporary times, more and more lucrative privately held companies from disparate sectors are going for IPOs in international stock exchanges such as Facebook, Twitter, GM, Visa Inc. etc. and paradoxically some public giants like Dell, H.J. Heinz, Blackberry, Richard Branson's Virgin Group etc. agreeably going private after remaining public. Some public corporations such as Best Buy, New York Times at least pondered over the transformation from public to private.

It is a fact that most reputed stock markets have strict listing regulations and procedures which include but are not limited to a sound financial track record of past years which shows that the company is profitable as well independent auditing of all the past financial data. The Big 4 accounting firms namely PricewaterhouseCoopers, Deloitte, Ernst & Young and KPMG are the most respected top-tier auditors which have undertaken tasks for big companies but second-tier lesser known firms are also available for hire. These top auditing firms are famous for their objectiveness and often steer clear from shady and disreputable firms wanting to get their accounts window-dressed or falsely certified. However, both private and public companies have their own advantages and drawbacks. It is a mistaken widely held belief that a private corporation is always smaller than or inferior in some sense to a public corporation. Did you know that the food-processing and chocolate-making giant 'Mars, Inc.' with annual sales revenue topping US$ 30 Billion employing 70,000 people is still a private company owned by the Mars family? How about the diversified Koch Industries, revenue of more than US$ 100 Billion and emloyer of 60,000 individuals, privately held by the Koch brothers, Toys ' R' Us, Amway, Hilton Worldwide, Bloomberg, McKinsey & Company, Kohler, Levi Strauss, etc. are all examples of large private companies. Some like the Big 4 Accounting firms are also private partnership firms, the part of the reason being the nature of industry they work in. Furniture-maker Ikea International is another good example of a private giant.

Every corporation starts off as a private one, it gradually grows and if the promoters aspire, it can turn into a public corporation. As we all know, A private organisation is closely knit and mostly a familial one with the key decision making with the founder CEO/Managing Director and his immediate family or co-founders with severe restrictions on the trading of its stock. For a capable private company to go public and raise capital from the public, finding the right amount of capital to be raised for the same, setting the initial price per share, ensuring minimum subscription, legal and regulatory compliance etcetera is essential. To address all these issues, a qualified Investment Bank is hired as the underwriter of the issue. The best known and largest full-service global investment banks are: JPMorgan Chase & Co., Goldman Sachs, Morgan Stanley and Bank of America Merrill Lynch among others. Whether you have a sizeable Small and Medium Enterprise (SME) or a large private company, there is limit to which you can leverage by adding debt to you capital structure. Though banks may lend generously for a good business, in most cases, it adds to your risk and bringing in fresh equity through third-party contacts such as investors and other companies may just be a short-term solution. In the long-term, bringing in public money through listing in a renown stock exchange is the best choice for growth and expansion. Yes, its success depends on the attractiveness of your business proposition and in which type of industry the company is operating in. 

Now once the company is a public company, the working of the company comes into the limelight. The Board of Directors of the company, the CEO and the CFO become the media face of the company and are now more responsible for their decisions and actions as they are answerable to shareholders and an extended array of stakeholders. If the company's top management does not perform well from this point forward, it faces risk of reduced profits or much worse a loss, reduced revenue, indulgence in fraud or embezzlement of funds, taking wrong decisions etc. then the share price would tumble and investor confidence will lower. The pressure on the company increases and it has to keep all the everyone happy. Positively thinking, if the company successfully capitalises on opportunities and boosts profits, revenue and utilizes the funds efficiently and effectively to name a few possibilities, then the share price will soar and it will benefit all the stakeholders directly and indirectly from continued growth. The image of the firm enhances and it can reap goodwill benefits. The net worth of the promoters who hold the lion's share of the ownership of the firm will be directly proportional to the stock performance. But that said, A Public company is again not necessarily superior to a Private one and vice versa.

Private companies generally have simpler organizational structures, lesser number of employees and relatively limited global accessibility, in most cases there are exceptions. Contrary to false belief, there is no maximum size, crossing which a company is no longer allowed to remain privately held. Private companies can be discreet about their financial information. It can be selective in which level of employees know how much about the company's financial scenario. Public companies have to reveal every bit of tiny detail about their financial status and survive from one quarter to another.

So which is better Public or Private? Well, the question is complex; the answer multi-dimensional. It depends on who you are as in which type of stakeholder are you. From my perspective, as the owner/founder/promoter of the company you may want your brainchild to yourself and a few others as long as possible and resist going public as it would provide you with great control and enviable flexibility in operations. If you are the government, public or private debate should be irrelevant to you as long as the company is abiding by all the rules and regulations and is carrying out business honestly, is an employment generator and promulgates entrepreneurship. As an investor, you would wish that a prosperous private company goes public, so that you can own some portion of the corporation and have a piece of the cake which would eventually reap returns and multiply your wealth. As a customer, you might be indifferent to the company time again if you are getting quality products that you want, with adequate innovation at an appropriate price, fulfilling your needs and wants. As an employee at any level, you may be more interested to know more about the company you work and rather have the company private and secretive but the catch here is that if you have enough faith in the management and you are well-remunerated, you may feel more at home in a private corporation. For bankers, a public company adds an added level of security for them in  dealing with a company especially for granting long-term credit as the there is greater financial transparency. Though not universally true, the same can apply to business associates and partner companies pursuing joint-business interests. In my opinion as long as a company has a dynamic vision and a long-term potential to succeed in its line of business both financially as well as operationally and it is being responsibly managed taking care of all the relevant parties and adding value congruent with innovation, growth and fluid expansion into diversified markets, the type of company does not matter so much at the end of the day.

-KAZIM MIRZA