5.5 Strategic Choices 161give it a higher public profile, increase sales, reduce the perceived risk of its
contract parties, and enable it to negotiate better contract terms. (h) A contributing
factor is that companies whose shares have been admitted to trading on a regulated
market must put in place a better risk management system, disclose more
information and ensure greater operating efficiency.
However, going public can also cause the firm many problems. The problems
relate to susceptibility to market conditions, costs, disclosure requirements and
loss of privacy, as well as potential loss of control. For many reasons, a stock
exchange listing is expensive: (a) The market valuation of shares may not always
reflect the quality of the firm. For example, smaller firms can suffer from the
illiquidity of their shares, and adverse market conditions will influence share
price. (b) Going public will cause large one-off costs. (c) In addition, compliance
with the requirements of a stock exchange listing requires plenty of management
time. (d) Listed companies must comply with a large and detailed regulatory
framework (based on company law, capital markets law, stock exchange rules,
IFRS and other accounting rules). There is an increasing amount of regulation
both in the EU and the US. (e) For this reason, a listed company must enforce a
compliance programme, which can be expensive. In the US, the Sarbanes-Oxley
Act is a good example of legislation that increases listed companies’ compliance
costs. (f) Listed companies must comply with a strict information management
and disclosure regime. (g) Because of disclosure obligations, listed companies are
more transparent than unlisted companies. Not only investors but even
competitors can benefit from the firm’s loss of privacy. (h) Listed companies are
on the market for control, unless they employ structural takeover defences (section
18.3). Anyone can buy a share block that confers important rights in the company,
and anyone can make a bid for the whole company. (i) Short-term shareholders
(for example hedge funds, investment funds, private-equity firms) may try to force
the firm to further their own short-term interests rather than the long-term interests
of the firm. For example, short-term shareholders can accept exorbitant
remuneration packages and share option programmes in order to make managers
act in the short-term interests of shareholders. The long-term survival prospects of
the firm’s business organisation are reduced, if shareholders and managers agree
to align their interests for their own short-term benefit. (j) Listed companies must
also comply with strict rules on the equivalent treatment of shareholders.
In practice, the choice between being a privately-owned company or a listed
company was, to some extent, influenced by five things in the early 2000’s: (1)
private equity and the takeover market; (2) the profitability of firms; (3) access to
debt and the level of interest rates; (4) the valuation of shares; and (5) the cost of a
stock exchange listing.
This is for the following reasons. (1) Whereas private-equity firms will obtain
private benefits of control after the takeover, small investors will not have any
access to private benefits of control. This one of the reasons why private-equity
firms have been prepared to pay more for shares than small investors have been
prepared to pay. Furthermore, even an industrial investor (with access to private
benefits of control) is typically prepared to pay more for shares than small
investors are prepared to pay. For this reason, it often used to be more attractive to