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The Stock Exchange - More Than Just a Source of Financing for Companies

June 20, 2017

The New York Stock Exchange (NYSE) helped companies raise $18.2 billion during the period January to May 2017 via initial public offerings (IPOs), while the Hong Kong Stock Exchange (HKEX) provided $4.8 billion in new capital. A total of 31 companies were listed on the HKEX, but only 28 raised additional capital.

 

On the one hand, stock exchanges around the world provide a valuable platform for businesses looking to raise funds for expansion. On the other hand, they provide an avenue for investors in those businesses to easily shift their investment position should they need to free up capital or if feel that the value of their position is likely to decline going forward. But from the perspective of businesses, are stock exchanges just an avenue in raising additional capital for expansion, or is there something more to it? A deeper look at this issue suggests a multitude of associated benefits and rationales for becoming listed on a stock exchange.

 

 

 

Benefits of Being Listed on a Stock Exchange

 

Although many companies become listed on a stock exchange to raise new capital, this is not always related to expansion. In some cases, companies raise funds for deleveraging, i.e. paying off existing debt on its balance sheet. This not only helps a company meet an existing payment obligation, but also reduces the risk of ownership associated with it.

 

Instead of raising additional funds, company owners sometimes off-load part of their existing holding by becoming listed on a stock exchange. This helps them diversify their personal portfolio, reducing risks associated with personal wealth, and brings in cash to meet any personal liquidity needs.

 

In traditional family-owned business, an heir may not be interested in running the family business. This often results in other heirs being forced to buy out the stake of this person, resulting in nasty negotiations as to what the right price should be. Being listed on a stock exchange puts a firm number on the net worth of the company, its value no longer subject to private negotiations between two parties. Instead, the company’s stock is driven by demand, supply, and other capital market conditions, as well as the company’s own fundamentals. Moreover, there are many other investors in the market ready to purchase this company’s stock, which takes the pressure away from other heirs involved in running the company.

 

Finding the right distribution partners is key to the success of any business looking to expand in an overseas territory. Many companies fail to capture the market at an adequate pace, as they are too focused on building their own distribution network. Companies already listed on a stock exchange, on the other hand, have the ability to quickly raise additional capital and outright acquire a well-established distribution network to seize the new market opportunity.

 

Being listed on a stock exchange also brings with it a certain level of brand recognition, thanks to the inherent publicity mechanism. Reports on listed companies are published by equity analysts and companies also start to receive press coverage. This publicity helps companies easily reach out to and attract foreign partners and investors that could help bring in specific expertise, aid in international expansion efforts, or simply improve upon the existing value of the company’s stock. The brand image upgrade also helps attract the best talent for the company.

 

Reasons for Being Listed on a Specific Stock Exchange

 

Once a company has made the decision to become listed on a stock exchange, the next step is to think about which stock exchange serves the purpose the best. Below are some reasons cited by companies listed on the NYSE about why they chose to be listed there:

  • Lower stock price volatility due to designated market-maker oversight and significant opportunity to secure the best price when buybacks or secondary listings are conducted

  • The quality and network of listed companies across virtually every industry and sector. This not only affords the opportunity to exchange innovative ideas, but also adds a ton to the brand name of the company

  • Access to a platform that reaches a world-wide audience, thanks to over 1.3 million twitter followers and 30 media outlets broadcasting on the trading floor

  • Support at different stages of company development, e.g. investor relations, marketing, compliance and governance. The NYSE offers solutions ranging from daily market commentary and analyst days to compliance training and education for board members

 

Conclusion

 

While stock exchanges around the world provide an excellent venue for meeting a company’s financing needs, they can also be leveraged to implement various other strategic decisions. Moreover, corporate owners can optimize their company’s capital structure to minimize overall entity risk, family-owned businesses can create efficient succession planning, and private equity investors can achieve a successful exit and free up funds for their next investment.


 


 

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