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The Bottom Line Expert Opinion: Going Public

Updated Friday 16th October 2015

Dr Peter Bloom takes a look at the potential risks and benefits of a company going public.

Businessmen running on money To go public or not to go public – that is the question. For modern businesses, whether or not to go public is one of the biggest decisions they can face. To do so brings with it potential lucrative economic gains but substantial risks as well. It also significantly shapes how citizens interact with businesses and the economy generally – in both potentially exciting and worrying ways. In this episode of the Bottom Line, guests discuss going public and what it means for companies as well as the public at large.

The traditional image of the public company is of a large corporation. Yet going public now extends to a wide range of businesses and new business models. This can mean that investors must now try to assess and profit off of companies that operate much differently than those in the past. Perhaps the most notable example is Facebook – who offers a free digital service to users. While the potential for huge returns for investors is clearly there, how such a company is and should be valued remains very much up for debate. It also raises broader questions as to how companies going public are valued and why. David Glance discusses why new companies are “going public” and how they are valued in his article “Facebook IPO – what it means for Zuckerberg and you”.

Significantly, “going public” is also “going global”. Stockmarkets are now arising in countries around the world, bringing with them new opportunities for companies to become IPOs within their own national contexts. One of the fastest growing and most famous of these is the Chinese stockmarket – including its technology listing “Chinext”, the so-called “Chinese Nasdaq”. Nevertheless, these bourgeoning stockmarkets face difficult growing pains. This includes stiff global competition and the finding the appropriate level of regulation. In the Chinese case, lack of transparency and charges of political bias in deciding who gets to go public have led many of its tech companies to choose Wall Street instead. Ufuk Gucbilmez writes about these issues facing new stockmarkets in his article “China’s Nasdaq fails to get off the ground as venture capitalists look to the US

Globalization has also helped to usher in and introduce new ways for “going public”. Conventionally, the decision of whether or not to become an IPO is thought to be exceedingly rational – will it increase profits or not. However, this ignores the cultural diversity of international business. The rise of Islamic Banking reflects these rich differences, as it creates the opportunity for countries to issue sukuks that unlike Western bonds adhere to Islamic law by prohibiting the charging or paying of interest. Sukuks are increasingly being issues by non-Muslim countries as well. As “going public” thus “goes global” it can thus evolve to incorporate new values and norms. Nafis Alam and Christine Ennew explore this emerging international trend in their article “Islamic finance goes global, but Malaysia still leads the way”.

A key factor preventing companies from choosing to become IPOs are the real financial risks it carries. However, these risks extend beyond just the balance sheet of businesses. Indeed “going public” may also endanger the public at large. It remains very much up to debate as to whether the financial industry is the best way to encourage economic stability and prosperity. These concerns were only exacerbated after the 2008 financial crisis. At issue is whether “going public” serves the interest of shareholders at the expense of society at large – limiting substantive investment in infrastructure, manufacturing and social goods. Do companies that “go public” sacrifice service, quality and ethics for the sake of meeting the economic needs of their public investors? Lawrence Mitchell examines the history of Wall Street and how its recent downsizing might be a good thing for the general public in his article “Wall Street has finally begun to downsize, but how did we ever let it get so big in the first place?”

Finally, public companies also create new opportunities not only for investors but also for citizens to challenge their policies. Obviously, becoming an IPO opens businesses up to new forms of public scrutiny. Whether or not this creates greater transparency or more ethical businesses is of course quite controversial and not all clear. However, those who object to the economic and environmental practices of corporations are finding fresh ways to use their public status to limit their influence. Recently, an anti-coal group released a fake press release supposedly from Whitehaven coal falsely saying a 1.2 billion dollar loan was being withdrawn due to concerns over the company’s environment policy. This cost the company millions of dollars, and to many represents a case of corporate fraud. However, for others it is an example of “civil disobedience”. Michael Adams investigates this emerging type of “public” activism in his article “Public nuisance - or fraud? Whitehaven hoax puts market creditability at risk”.

This article was written to accompany the Autumn 2015 series of The Bottom Line. For more information on the series, visit the series page.

 

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