Public Companies
November 17, 2020
What is a Public Company?
A public company is an entity whose equity ownership is available via the trade of stocks or shares on a stock exchange or over-the-counter market, thus making the ownership distributed among general public shareholders. The value of the shares are determined by daily trading in the public market, following the price being initially set in an Initial Public Offering (IPO). Public companies differ from private companies in that private companies do not trade their shares publicly. There are also several different disclosure and reporting requirements for a public company that private companies do not have to satisfy.
The reason the company is known as “public” is that the equity ownership is made up of anyone who owns shares in the company. This can be anyone who meets the ownership requirements of the stock exchange that the shares are traded on.
Key Learning Points
- A public company is an entity whose equity ownership is available via the trade of shares on a stock exchange or over the counter market
- Private companies do not trade their shares publically
- Public companies are under an obligation to report under more stringent requirements and have to make more disclosures than private companies
- Public companies also have advantages when it comes to access to finance, as being public offers enhanced access to debt markets, and the ability to raise finance through equity offerings
Private to Public, and Public to Private
Most public companies start out as private companies, as entrepreneurs, inventors, coders, or family owned businesses start new ventures. The ridesharing apps Uber and Lyft are both recent examples of private companies that went public through an IPO in the US, both in 2019. The video conferencing app Zoom also went public in 2019, and is one of the great recent success stories for investors, as the app became incredibly popular during the Covid-19 lockdown, starting the year 2020 with a stock price of $68.72 and peaking nine months later on 1st September 2020 at $457.69.
Some public companies are also brought back into private ownership. This could be for any number of reasons but is usually because a private company or venture capitalist sees the public company as a good investment. This involves delisting the public company from the stock exchange, with the existing shareholders receiving cash or other stocks as consideration.
One notable example of a public company being brought back into private ownership is Panera Bread, a large bakery-café chain in the US, which had traded on the NASDAQ exchange; in April 2017 it was bought by a holding company called JAB Holding Company, who owned brands in the same industry including Krispy Kreme and Keurig Coffee. Private Investors often look for complimentary undertakings that could lead to savings in operating costs through synergies.
Advantages and Disadvantages of a Public Company
Public companies are under an obligation to report under more stringent requirements and have to make more disclosures than private companies. This could be seen as a disadvantage over private companies, as more information about the performance and operation of the business will be available publicly, but being forced to work to more stringent guidelines can be an advantage. Any company listed on a stock exchange in the US has to operate under the requirements of the Sarbanes-Oxley Act, or SOx, which are reforms implemented by the Securities and Exchange Commission (SEC) following the fraudulent financial reporting of the company Enron. These rules include stringent financial controls over the operations of a business, as well as rules over recordkeeping requirements. There are criminal penalties for violating the Act. Having stronger financial controls should be considered a good thing for a company, and will certainly be considered an advantage by potential investors.
Public companies also have advantages when it comes to access to finance, as being public offers enhanced access to debt markets, and the ability to raise finance through equity offerings. Once public, a company can also issue new share offerings to raise further capital, useful for planned expansion.