Why companies trade their privacy and decide to wash their underwear in public
When companies like Telkom and Nedcor tear themselves apart in the full glare of the media, you may wonder why they choose to be public companies and not private ones. A quote on the stock market can be a double-edged sword, but it does have its uses and can be swung for the benefit of shareholders. Here are some of the reasons that companies go public and some of the things this can achieve.
1) Founders selling out: After years toiling to build a company, the founders may choose to sell part of it to outside shareholders, although they'll often retain management control.2) Raising fresh capital: This is a much better reason to invest in a new issue than (1). Many small companies need new capital to spend on research, building a manufacturing facility or a sales team.3) Access to cheap funds: Companies sell new shares to outsiders without any commitment to pay a dividend or any guarantee of a positive return. The return to shareholders depends entirely on the progress of the company. The alternative, bank finance, is expensive and must be repaid one day.4) An acquisition currency: A company like Barloworld is constantly on the look out for acquisitions to add to its group. It's easier to pay for these acquired companies by giving shares to the vendor than cash. These shares also act as an incentive to the vendor.5) Stock options: Most companies these days grant stock options to directors and senior employees. These can be worth a lot of money but only if the company succeeds and its share price rises - to the benefit of all shareholders. Stock options are an alternative to cash payments and don't cost the company hard cash - although when exercised, stock options dilute the interests of other shareholders.6) Opportunism: If a company's share price is very high, for one reason or another, why not take advantage of this to issue new shares? This may be to either raise new capital or acquire a rival business. Smart executives will turn the swing of the stock market to their advantage.7) Share buy backs: A company can do the opposite of (6) by buying back its own shares cheaply. This can enhance earnings per share for the benefit of all shareholders.8) Scrip dividends: You may have shares in a company that has offered you the chance to take a dividend in the form of shares instead of cash. This is a commission-free way of acquiring new shares, but it does make Capital Gains Tax (CGT) calculations very messy, and for that reason I always take cash.9) Reputation: Many executives have told me that they've floated on the stock exchange to gain credibility with their customers. Every year in Johannesburg there's a new flurry of stock exchange floatations. Proof that going public has its attractions - and widens our field of opportunity!
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The past is not a guide to future performance. Trades in stocks recommended by Red Hot Penny Shares are small company shares. By their nature, such investments can be relatively illiquid and, as a result, hard to trade. This makes such shares more risky than other investments. Please seek independent financial advice if necessary. Profits from share dealing are a form of income and subject to taxation. Levels and bases of, and reliefs from, taxation are subject to change, and depend on individual circumstances.
