Why might a private limited company want to expand to become a public limited company? What are the advantages and drawbacks to doing so?

There are various reasons why a private company might want to become a public limited company, but the most common reason is to raise money in the public market by issuing shares. Investors who are eligible to participate in the stock market will be now able to trade a piece of the company. With many investors being able to invest in the company, it will be easier to raise large sums of capital compared to private equity funds. With a higher capital, the company is able to pursue more investment projects to stimulate growth within the company.

The main disadvantage of being a public company is that there are higher regulatory and transparency requirements, the risk to take over and prone to short-term results. Public companies are required to release their financial statements quarterly and financial analysts would use the information to determine the value of the company. If the company’s profits and growth rates are less than expected, the value of the company would experience a decrease. Therefore, public companies have more pressure from its shareholders to have healthy quarterly earnings and growth rates. The pressure to perform well each quarter often causes the company to focus on achieving short-term results instead of the long-term vision of the company. The risk to takeover is also prominent if the stock price of a company drops significantly. Other companies could see it as an opportunity to acquire the company at a discount and would purchase the majority of the stocks in the market, taking over the company through acquiring its shares.
 

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Answered by Marco C. Business Studies tutor

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