Introduction to Corporate Finance

PART 4: CAPITAL STRUCTURE AND PAYOUT POLICY

(usually 7% in the US) and the initial underpricing of the firm’s stock (roughly 15% on average in

the US) represent a large transfer of wealth from current owners to the underwriters and to the new

shareholders. In addition, there are initial and annual listing fees that have to be paid. Table 12.4

provides estimated listing fees faced by Australian listed companies.

TABLE 12.4 ESTIMATED LISTING COSTS IN AUSTRALIA

The following table provides a guide to the fees that apply to equity listings in Australia from 1 July 2014.

Market capitalisation* Initial fee Annual fee

$10m $61,561 $23,779

$50m $100,307 $31,241

$100m $128,289 $40,568

$500m $287,574 $55,377

Note: the above fees apply as of 1 July 2014.

*Calculation based on securities for which quotation is sought.

Source: © ASX Limited ABN 98 008 624 691 (ASX) 2013. All rights reserved. This material is reproduced with the permission of ASX. This material should not be reproduced,

stored in a retrieval system or transmitted in any form whether in whole or in part without the prior written permission of ASX.

4 The managerial costs of an IPO. As costly as an IPO is financially, many entrepreneurs find the

continuous demands made on their time during the IPO process to be even more burdensome.

Rarely can CEOs and other top managers delegate these duties, which grow increasingly intense as

the offering date approaches. There are also severe restrictions on what an executive can say or do

during the immediate pre-offering period, and because the process can take months to complete,

the distraction costs of going public are very high. Top executives must also take time to meet with

important potential shareholders before completing the IPO and indefinitely thereafter. Even after

the IPO is completed, ongoing disclosure and reporting requirements can be a significant draw on

the management’s time.

5 Stock price emphasis. Owners and managers of private companies frequently operate their firms in

ways that balance competing personal and financial interests. This includes seeking profits, but it

can also include employing family members in high positions as well as other personal benefits.

Once a company goes public, however, external pressures build to maximise the firm’s share price;

as managerial shareholdings fall, managers become vulnerable to job loss either through takeover or

through dismissal by the board of directors.

6 Life in a fishbowl. Public shareholders have the right to a great deal of information about a firm’s

internal affairs, and releasing this information to stockholders also implies releasing it to competitors

and potential acquirers as well. Managers must disclose, especially in the IPO prospectus, how

and in what markets they intend to compete, information that is obviously valuable to competitors.

Additionally, managers who are also significant shareholders are subject to binding disclosure

requirements and face serious constraints on their ability to buy or sell company shares. Similarly,

company directors will be subject to greater scrutiny, disclosure and trading restrictions.

In spite of these drawbacks, often several hundred management teams each year decide that the benefits

of going public outweigh the costs, and begin the process of planning for an IPO. In addition to these

standard IPOs, four special types of IPOs warrant attention.

What are the pros and cons of

doing an IPO?

thinking cap
question