The Pros and Cons of Stock Market Flotation

September 30, 2022

Explained for MBA university graduates

Picture of a stock price index display
Flotation can be a windfall for successful private companies looking to expand.

As a successful company grows and begins to look at its development options for the future, they’re likely to consider stock market flotation as their next big step. This is the process whereby a private company becomes public by issuing shares that can be bought, sold, and traded on the free market.

The biggest benefit of flotation for growing companies is that it allows them to obtain financing for new projects and acquisitions without having to rely on their own internal revenues. This can be of particular benefit to large corporations seeking to branch out into international markets.

Flotation Can Increase Confidence and Trust in a Company

Before flotation, every company is vetted through a rigorous due diligence process. Publicly traded companies are then subject to strict regulations, including requirements to provide regular public updates on key information about the business. As a result, these companies gain more confidence and trust from investors, customers, lenders, and suppliers, and a heightened profile in the market.

A groups of people shakes hands after a meeting
Flotation can help build trust and confidence in a company.

Going Public Creates Limitations on How a Company Can Be Run

This heightened profile has certain costs, though. The regulations that increase market confidence also create fairly strict limitations on how a company can be run in terms of their transparency and conduct, and may require hiring new executives (or entire departments) that are familiar with the intricacies of compliance, particularly for large multinational corporations that may operate in several different jurisdictions. For business school graduates, this may be where your MBA training proves particularly useful, as these international regulations can be difficult to navigate.

Market Flotation Can Also Motivate Employees

MBA university graduates understand the importance of a committed and incentivized workforce, and flotation can become an important tool for motivating employees. By including share offers in their compensation packages, public companies can give their employees a greater stake in the long-term success of their employer, sharing in its growth and encouraging a closer connection to the business.

A group picture of MBA students
Share options can help employees feel connected to a company’s success.

Business School Graduates Should Be Aware of the Costs of Flotation

Although flotation provides a net financial gain when done properly, it doesn’t come cheap. Companies considering flotation need to be prepared for a range of expenses, including underwriting fees, legal fees, and registration fees, not to mention the additional operating costs necessary to comply with the regulatory burdens they take on as publicly traded companies, which may require major restructuring. The costs aren’t strictly financial, either – the flotation process takes up significant management time, both in the lead-up to an IPO and after, and new executives with the necessary skills and training will need to be hired.

Whether a company ultimately finds the benefits of flotation to be worth the resources and the additional regulations will depend on many factors specific to their situation, and MBA graduates should draw on all of their skills and knowledge in assessing these tradeoffs to help their employer make the right choice.

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