Question

Ali Salem is the manager of a small chocolate company located in Abu Dhabi, and it is a family business. His father established it as a small chocolate shop in 1983. The chocolate shop has experienced a significant growth in the last 15 years, and that is was due to the leadership of Ali. During these years, he and his partner (Mr. Hamdan Mubarak) changed the character of the company from being a small shop to a bigger company. Currently the company is producing its own brands and exporting some of them to neighboring countries, like Saudi Arabia and Kuwait. In addition, the company is importing different types of chocolate brands from Europe and the USA. Due to the high demand on the products of the company, Mr. Ali and his partner decide to expand the business and to open different branches and factories in the MENA region and Europe. A Financial advisor hired by Mr. Ali estimated that this expanding requires at least $ 200 million. However, this amount of money is far beyond the financial means of the two partners. As a reason of this situation, they decided to transfer the company into a public one by issuing 10 million shares at $20 a share. The company will be listed on the Dubai Financial Markets (DFM). In addition, Ali and Mubarak realize that as the company is getting bigger and going public, it is better to hire a management team with international experience in the chocolate industry

.1.   What are the advantages of changing the company from a small company owned by two to a public company?

Answer 1

There are numerous advantages of going public, not just financial but related to general management as well. Let's discuss the financial advantages first.

Financial :

• Fundraising - Easier to raise funds through equity as well as Debt, once you go public. Most of the Banks offer upto 2 - 3 times debt based on equity. Higher the equity, more debt can be purchased. Further, more instruments are available for debt & equity financing, because of enhanced regulatory compliance.
• Reduced Cost of Finance - Although equity is considered a costlier source of finance, it opens avenues to get more debt finance (upto 2-3 times of all equity). Debt is far cheaper than equity, as it provides a tax shield. This use of debt reduces the overall cost of finance for the company
• Exits - It is easier for promoters or shareholders to exit the company, as enough liquidity is available for the listed stock. Deals could be on the exchange platform or through outside negotiations
• M&As / JVS & Tie-ups - A publicly listed company has lot of details in public domain, it gets lot of traction of Investment bankers for M&As (Both as a target or acquirer), JVs (Foreign as well as domestic) & Technology tie ups. This is because the company is now more transparent, compliant, & trustworthy and it also comes in the radar of Investment bankers

Non Finance :

• Publicity & Enhanced Credibility - During the IPO offer, the company gets a lot of promotion and advertising. The brands get popularity and identity. The company also gets credibility as a listed firm and buyers, intermediaries & end users, all have far more faith and expectation from company's products
• Easier to attract and retain talent - As a known name and credibility, the company attracts quality talent. and it becomes easier for it retain the talent (Known name)
• Professional Management - As organisation grows after the IPO, generally by leaps, as a large fund is available for growth, it needs professionals to manage operations apart from the promoters. It gets a varied, diverse and knowledgeable board of directors. It also gets professional operational management
• Systems and processes - As the orgainisation grows, systems and processes are introduced , which bring in operational efficiency
• IT/ ERP - As organisation grows, it becomes important and less costlier to introduce ERP systems, further increasing operational efficiency
• Transparency - Regulatory Compliances make organisation more transparent and management more responsible.
• Speed & Better practices - This comes along with a professional management
• Outside Advice/ Consultancy