162 5 Equity and Shareholders’ Capital
sell the business to a private-equity firm or an industrial enterprise than to go
public. (2) The high profitability of firms and access to cheap debt in the early
2000’s meant that it was unnecessary for many unlisted firms to offer their shares
to the public. Listed firms tended to return funds to shareholders in the form of
share buybacks and dividends. (3) Where the cost of debt is low, firms may prefer
debt. In addition, a high gearing increases return on equity and can act as a
takeover defence. Access to low-cost debt was relatively easy in the early 2000’s
(but access to any kind of financing from the capital market was practically
impossible during the financial crisis that began in 2007 because of the drying-up
of the interbank market and the meltdown of financial assets). (4) The high
valuation of shares before the crisis could, in principle, have increased IPOs as a
form of exit by giving the owners of unlisted firms (for example, private equity
funds) an opportunity to obtain a high price for their shares. However, as said
above, private-equity firms and industrial buyers were often able to pay more. (5)
Finally, the high cost of complying with the Sarbanes-Oxley Act and the risk of
class actions put off many foreign companies from listing in the US. At the same
time, the increased sophistication of their home stock markets encouraged compa-
nies to seek IPOs in their home market.^133
Foreign firms may prefer the London Stock Exchange or their own national stock
exchanges.^134 For example, the IPO of Qimonda AG in August 2006 was the first IPO of a
German firm on the NYSE since 2002.^135 The Hong Kong Stock Exchange has also been a
big beneficiary.^136 On the other hand, there is new legislation caused by the Sarbanes-Oxley
Act. This legislation increases the cost of a stock exchange listing and may keep some
companies private in the future.
Therefore, the firm (or its controlling shareholders) may choose to go public for
many reasons such as the following: (a) the firm is very large; (b) the firm needs
more equity and the controlling shareholder wants to retain control by opting for a
large number of small shareholders (after an IPO) instead of one or more powerful
financial or industrial investors (private placement); (c) the firm plans to grow
through takeovers; (d) the founders or existing shareholders want to exit the
company without selling the company’s shares to a private-equity firm or a
competitor; (e) market investors are prepared to pay an exceptionally high price
for shares (such as during the dot-com bubble); (f) founders and existing
(^133) See The Department of the Treasury, The Department of the Treasury Blueprint for a
Modernized Financial Regulatory Structure (March 2008) p 2: “Due to its sheer domi-
nance in the global capital markets, the U.S. financial services industry for decades has
been able to manage the inefficiencies in its regulatory structure and still maintain its
leadership position. Now, however, maturing foreign financial markets and their ability
to provide alternate sources of capital and financial innovation in a more efficient and
modern regulatory system are pressuring the U.S. financial services industry and its
regulatory structure.”
(^134) See, for example, Metso Corporation, stock exchange release of 26 July 2007.
(^135) Ausländische Unternehmen meiden Amerikas Börsen. Qimonda wird erster Börsengang
eines deutschen Unternehmens an der NYSE seit 2002, FAZ, 9 August 2006 p 18.
(^136) London as a financial centre. Capital City, The Economist, October 2006.