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A publicly traded company is a company that offers securities for sale to the general public. It usually does this through a stock exchange or through market makers if it is operating in over-the-counter markets.
The main advantage of public financing is that the company’s shares are owned by a great number of shareholders. Because of this, it is easier to raise large amounts of capital. In addition to increasing the number of shareholders, the company can gain access to less-expensive sources of capital.
The company achieves an enhanced public image and, thus, exposure and prestige. Because of this, it can attract higher-quality employees and a higher level of management talent.
Public companies are also in a better position to facilitate acquisitions, which they do through shares of stock. They create additional multiple financing opportunities, including debt, equity, and perhaps cheaper loans for financial institutions.
A privately held business is generally one whose shares are not available for trading to the public. It is usually owned by the company’s founders, their families and estates, or a very small group of investors.
Private financing also has several advantages. There could be increased capital because investors are willing to buy the company’s stock at a higher price than if it were trading on the market because they are willing to pay more in order to privately control the firm.
There is also the possible reduction of administrative costs, like reporting and registration, along with regulation costs and communication with shareholders. A private firm saves all of these costs.
Often, management takes over and privately controls a company. When this is the case, they have an immediate incentive to improve the company’s performance because they are key investors as well. This also results in a higher level of investor involvement. Publicly traded companies’ shareholders are a large, anonymous group of people who are often uninformed and do not typically know how to run the business, much less its daily operations; therefore, they are not in a good position to manage it. Private investors can offer expert knowledge and direct oversight in a way that can benefit performance.
While a company can become public through an initial public offering (IPO), it can also go private through a leveraged buyout. A leveraged buyout is the acquisition of a company wherein the purchase is financed through high levels of debt—perhaps a combination of 10% equity and 90% debt.
The cash flows of the business being acquired finance the debt. Because debt usually has a lower cost of capital than equity, the returns on the equity increase with the increasing debt. The debt effectively serves as a lever—hence the term “leveraged buyout.”
The targets for a leveraged buyout would include the following:
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