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3 “Hidden” Reasons Why a Company Might Go Public

Credit: Simon Cunningham

Initial public offering, or IPO for short, can be an exciting event. There is usually a grand buildup of excitement surrounding an IPO. The prospectus might include attractive reasons on why we should invest in the company. Yet, there are also many other reasons why a company might want to choose the IPO route. And these reasons might not be something a potential future investor would like to hear. We will explore three such reasons today.

Shareholder Dispute

One reason why a company might head for the gong is that there has been some internal dispute between its shareholders. One typical form of dispute is the debate surrounding the direction of the company. If some shareholders prefer to grow the company and reinvest all of the company’s earnings while others are voting for the company to start paying out dividends to themselves, the direction of the company would be in limbo.

One way of resolving that is to bring the company to the public market, allowing the previous shareholders a chance to cash out their investment if they disagree with the future direction of the company.

Running Out Of Cash

Another reason why a company might go for IPO is that it is facing some form of a liquidity crisis. One example might be that it has always been relying on bank loans to fund its operations. However, due to worsening relationship with its banks, its credit facilities might be facing termination. To solve that liquidity crunch, the company would have to tap on to the public market to replace its ending loan facilities with the banks.

Selling Out

Lastly, the management and existing shareholders of a firm going IPO may see it as a way to exit their investment. They might be heading to the public market, in hope to sell off their investment completely in the near future.

Foolish Summary

There are many more “hidden” reasons on why a company might choose to head for an IPO. The important thing is we, as investors, need to be aware of all these issues before investing into an IPO.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim doesn’t own shares in any companies mentioned.