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Ssh-We Are Staying Private
Remaining a private company when the Dow Jones Industrial Average is at an all-time high might not seem to be a wise decision. Transforming to a public corporation, however, would not benefit our eraser company. Going public would take away much of our control over the company, subject the company to increased regulation, and disclose company information that we prefer to keep secret. Some of the key arguments in favor of an Initial Public Offering (IPO) do not apply to our company, Erasers for Stars, Inc. A bank loan will be much less expensive than the costs associated with an IPO. For all of the foregoing reasons, it is a better choice to remain as an innovative, privately held eraser company.
In the last few months, the Dow has surged to record levels, which might offer a tempting climate in which to go public. The IPO process, however, takes a great deal of time to complete. During this administrative process, the market could take a plunge. If this drop were to occur, the stock could not be tendered for as high a price. NYMEX, which went public on November 17, 2006 and doubled its offering price, and Chipotle Mexican Grill, which also recently went public, did extremely well in the bullish market. It is impossible to predict, however, whether the promising market conditions will continue.
When a company goes public, a certain amount of control is lost. A public company has to report earnings and satisfy its shareholders. Public shareholders demand profits. Our successful company would lose the flexibility to risk short-term margins in exchange for long-term, increased profitability. For example, our company may desire to diversify its product line to include more than erasers. This could increase costs in the short term, displeasing shareholders.
Public companies have to file reports with the Securities and Exchange Commission (SEC) every quarter. These reporting requirements have become more burdensome due to rigorous accounting standards under the Sarbanes-Oxley regulations. The filing of these reports requires a great initial and continuing expense in terms of both time and money. Our company would have less time to focus on its new product lines. Competitors would have access to all of the information filed in these reports. Being a public company would open us up to sharing our secrets. Given the fact that our company specializes in products that are based upon the newest popular items, we need to keep our competitors in the dark. A public company also is more susceptible to litigation based upon what its reports disclose or fail to disclose. Oriental Trading, Inc., is one of our eraser company’s chief competitors. It is possible that for the same reasons we choose to stay private, Oriental Trading remains private as well, after being sold earlier in 2006.
The primary rationales that companies typically propose for going public do not apply to our company. One of the main arguments floated for going public is that it is a company’s only source of raising money. Our company, however, should be able to obtain a bank loan, since it is a major, established company and a bank would be willing to use our plant as collateral. Underwriting, listing, legal, and accounting fees are just some of the expenses of an IPO. The closing costs of a bank loan are much lower than those charged for an IPO. A second reason why a company may decide to go public is that the major shareholders are looking to sell their shares. A third reason to go public is to compensate employees with stock options. These second and third reasons are not relevant to our company since the only goal to be considered is funding our new plant.
Our decision to stay private enables us to retain control, not be subjected to SEC reporting, and keep information about our company out of our competitor’s reach. Typical arguments in favor of a company going public are not applicable to our business. The expenses of obtaining a bank loan compared to the expenses of an IPO are significantly less. For our company, remaining private is the wiser decision.
Sources:
“Advantages of Going Public.” 2005. Mergers-R-Us.com. 18 November 2006. <http://www.mergers-r-us.com>.
Benton, Gary L. “The Advantages and Disadvantages of Going Public.” 2005. Pillsbury Winthrop Shaw Pittman. 18 November 2006. <http://www.pillsburylaw.com>.
“Public Company.” 2006. Wikipedia Foundation, Inc. 18 November 2006.
<http://en.wikipedia.org>.
“Some Companies Finding Government Regulations Helpful.” 2006. PricewaterhouseCoopers. 18 November 2006. <http://www.cfodirect.pwc.com/CFODirectWeb/Controller.jpf>.
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