Deciding to Float

MAKING A DECISION

Choosing whether or not to float is an important decision for any company and will not be appropriate in all circumstances. There are a number of advantages and disadvantages to flotation which should be carefully weighed up before any decision is made.

The advantages and disadvantages summarised in this guide should be considered carefully in light of the particular circumstances of the individual company and the objectives of its stakeholders. It is only when a company’s strategic goals and management and shareholders’ aspirations are aligned to the benefits that a flotation can bring, that it is likely that a flotation is an appropriate move to make.

Advantages of a flotation

• Liquidity: A flotation allows a company to change its shareholder base, bring in new investors and allows existing shareholders to achieve a partial or full exit on flotation or subsequently on the secondary trading market.
• Vendor freedom: Flotation can provide vendors with an exit without providing warranties or indemnities to the new shareholders (although warranties and indemnities will need to be granted to any underwriter of the share issue).
• Improved profile: Flotation gives a company greater public exposure and enhances its profile amongst stakeholders; this may, in turn, have commercial benefits. Listed and quoted companies, for example, are required to publicly announce interim and full year reports, providing greater visibility to potential suppliers and customers of their financial position.
• Non-executive directors: Under corporate governance guidelines (see later section on the Combined Code), Listed companies must have non-executive directors, and quoted companies. These can bring experience from other Listed and non-Listed companies, benefiting the business strategically and also, potentially, from a profile perspective. Quoted companies typically adopt large portions of the corporate governance guidelines, including the retention of non-executives, as they represent best practice.
• Access to long-term capital: Raising equity capital on flotation can benefit a company if it is seeking to develop its business. Capital markets remain accessible following flotation, enabling companies to raise further capital through subsequent placings, rights issues and open offers. This capital can enable companies to invest in new products and further to develop the business.
• Use of shares as acquisition consideration: A company seeking to grow through acquisition can offer its equity as consideration as an alternative to cash. Not only does this enable the acquiring company to maintain appropriate levels of gearing through not having to take on additional debt, this enables the target company’s shareholders to participate in the success of the expanded group. Additionally, by having its shares traded on a public market, the acquiring company’s securities will be more attractive to the target’s shareholders as there will be a secondary market that will allow them to realise their investment at a time of their choosing.

Disadvantages of flotation

• Time consuming: The IPO process itself is time consuming and costly, making resource availability during the process an important consideration when looking at the potential benefits of a flotation.
• Unwanted attention: In order to ensure that shares are traded on a public market in an orderly manner, the market must be kept up to date of changes in the performance and prospects of the company – even when these are adverse. Consequently, an inescapable part of a company having its securities admitted to a public market is that companies can face increased scrutiny and attention.
• Loss of control: Privately run companies often have common shareholders and management. Post-flotation, there can be a feeling of loss of control. The public company’s board will consist of both executive and non-executive directors, and be answerable to all shareholders.
• No speedy exit: After flotation, shareholder directors and significant shareholders remaining with the company may be required to retain their shares for a period to demonstrate commitment to the company.
• Reporting obligations: There are more frequent and onerous reporting obligations for quoted companies which can lead to increased costs for a company whose securities are traded on a public market. Depending on the market the company is admitted to, there may also be other disclosure requirements for certain corporate actions and transactions.
• Other costs: After admission, companies whose securities are traded on a public market are likely to incur higher ongoing costs, such as directors’ fees, public relations expenses, registrars’ fees and higher audit charges.
  

The above text is part of the QCA's A brief guide to floating a company in the UK. The guide gives a brief impartial introduction to the primary public markets in the United Kingdom which are used by companies, both domestic and international, as a trading platform for their shares and as a means of raising external finance for capital growth and development.

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