going public

GOING PUBLIC

Private and quoted companies are similar in one way: both have shareholders who own a part of the business. However, a private company cannot invite the general public to buy its shares and its shareholders cannot sell their shares unless the other members agree.

Anyone can buy the shares of a quoted company. They are freely bought and sold in a special market-the Stock Exchange. When a company wishes to be quoted, it applies to the Stock Exchange for a quotation, which is a statement of the share price. If the application is successful, the Stock Exchange deals in its shares and publishes their price each day.

There are three main reasons why companies obtain a quotation. First, many companies need to raise money to expand their businesses. For example, they want to build a bigger factory or produce a new range of goods. To finance this, they could try to get the money from a bank. But perhaps they have already borrowed heavily, so they do not want to increase their debt.

Secondly, there are companies which have been built up by their owners over the years. As the owner gets older, he does not want all his money to be tied up in the business. Therefore he sells part of the company to the public.

Finally, there is the type of business which started many years ago. It has now become a large company and its shares are spread among various members of a family. Some may have no interest in the company, while others have different ideas about how to run it. Shareholders disagree strongly, so it becomes difficult to run the company properly. In such a case, the only solution may be to obtain a quotation on the Stock Exchange.

There is one reason why the owners of a company may not wish to obtain a quotation. If the directors are the only shareholders-or have very large shareholdings-in their company, they may be getting substantial benefits from it. For example, the business may own things like the directors' houses, their cars and even their wives' cars. It pays perhaps for their petrol and holidays, which are business expenses. In this case, it may be better not to become a quoted company.

A Comprehension

1. What is the main difference between a private and quoted company?

2. How does a company obtain a stock exchange quotation?

3. Why do some companies prefer not to ask the bank to finance their expansion?

4. Explain the meaning of these phrases: (i) tied up (1. 16), (ii) substantial benefits (1. 26).

5. What problem can arise if several members of a family have shareholdings in a company?

6. Some directors do not want their companies to obtain a stock exchange quotation. Why?