Why does a company go public?

Sensei answered 3 months ago …

There are a variety of reasons why a company might "go public", but the primary reason is to unlock shareholder value. Remember that, prior to going public, all of these companies were "private". So, as an example ...

Thirty-odd years ago a bunch of guys were writing customized computer programs in someone's basement. Along comes a customer and asks them to create a program that will operate their systems more efficiently. They said, "Sure, but we want a royalty on every copy of the program we develop that you use." The royalty income skyrockets and the company makes hundreds of millions of dollars.

Now what? Their little "upstart" is now worth a small fortune and the royalties on that program they wrote continue to flow. If they keep the company "private", they'll all make millions of dollars - maybe tens of millions of dollars, over time, in salaries and dividends they can pay themselves. But the problem for them now is that there is no way for them to realize on the value of the company. Owning a company that is worth a billion dollars doesn't, to use your words, "add an extra wing to their mansions" - if they even own a mansion.

If they go to the bank to buy that mansion, the bank manager will say, "Yeah, you're company is worth a fortune, but how will you get that money? Who'll buy it?"

If they find someone willing to buy it, the buyer won't give them "full value" and if they can get "full value" the buyer will want "terms" (i.e. vendor financing of some sort.)

But if they "go public", they can sell a fraction of the company, keep a large portion of it (remember, it's now a "public company" so they can sell their shares if they want) and walk away with a real fortune - in cash; not in "paper".

Now they can buy that mansion or "add an extra wing". By selling "treasury shares", they can expand the operations, move into new areas of the business, develop new programs, etc. And all of this without having to go to the bank.

Yes, I've given an example of an extremely successful adventure, but this is the idea in taking your company "public".

The "upstart" in my example is, in case you hadn't already guessed, Microsoft Corp and that software program they wrote back in the '70s was MS-DOS. Today, Bill Gates is a multi-Billionaire. His original "gang" aren't doing too badly either. Remember, we're talking real coin here - not paper assets.

The question is ... had Microsoft not "gone public", would Gates still be the wealthiest man in the world? Of course not. He'd likely be a mega-Millionaire, but not a Billionaire. Most of Gates' wealth is tied up in Microsoft stock. Taking the company "public" unlocked that shareholder value and crystallized that wealth. And that is the primary reason shareholders take their private companies "public".