Complete Guide To Corporate Finance


Raising Capital - Introduction To Raising Capital

When most people think about a company raising capital, they think about a private company going public - selling an initial public offering (IPO) of stock. An IPO can indeed be an effective means of raising capital for corporate ventures, and it has many upsides:

Money to grow the business: With an infusion of cash derived from the sale of stock, the company may grow its business without having to borrow from traditional sources, and it will thus avoid paying the interest required to service debt. This "free" cash spent on growth initiatives can result in a better bottom line. New capital may be spent on marketing and advertising, hiring more experienced personnel who require lucrative compensation packages, research and development of new products and/or services, renovation of physical plants, new construction and dozens of other programs to expand the business and improve profitability.

Money for shareholders and others: With more cash in the company coffers, additional compensation may be offered to investors, stakeholders, founders and owners, partners, senior management and employees enrolled in stock ownership plans.

Company stock and stock options may be used in an effective incentive program. In recruiting talented senior management personnel, stock and options are an attractive inducement. For employees, a performance-based program of stock and/or option bonuses is an effective means of increasing productivity and managerial successes. Stocks and/or options may also be used in other forms of compensation, as well.

Other benefits of going public: Once the company has gone public, additional equities may be easily sold to raise capital. A publicly-traded company with stock that has performed successfully will usually find it easier to borrow money, and at a more favorable rate, when additional capital is needed.

A publicly-traded company may also have more leverage in negotiating with vendors, and it may be more attractive to customers. This is a critical aspect of business; a company that keeps vendor costs low may post better profit margins. Customers usually have a better perception of companies with a presence on a major stock exchange, another advantage over privately-held companies. This favorable opinion is largely due to the audit and financial statement scrutiny that public companies have to undergo on a regular basis.

A publicly-traded company conveys a positive image (if business goes well) and attracts high-quality personnel at all levels, including senior management. Such companies are growth-oriented; they answer to a board of directors and shareholders who continually demand increased profitability, and are quick to rectify management problems and replace poorly performing senior executives.

But before undertaking the complex, expensive and time-consuming preparations and incurring the risks involved, the upside and downside of this critical move must be fully assessed. Although there are numerous benefits to being a public company, this prestige comes with an increased amount of restrictions and requirements. (Learn more in The Murky Waters Of The IPO Market and The Biggest IPO Flops.)

In this section of our corporate finance walkthrough, we'll first explore how a company goes public. We'll then look at lesser-known, less-glamorous methods of raising capital, including new equity securities (secondary offerings) and rights offerings. We'll also look at how dilution impacts existing shareholders, and we'll touch on the issuance of long-term debt for financing.

Public Issue And Cash Offer
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