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A “public company”
A “public company” typically refers to a
corporation with many shareholders that is permitted to offer its
stock for sale to the general public through two national exchanges,
the New York Stock Exchange and the American Stock Exchange,
regional stock exchanges such as the Pacific Stock Exchange in San
Francisco, the NASDAQ National Market and Small Cap Market, and the
Over-the-Counter markets which include the NASDAQ-administered
Over-the-Counter Bulletin Board and the independent “Pink Sheets.”
One advantage of being a public company is the
ability to raise funds and capital through the sale of its
securities. Public companies may also issue their securities as
compensation for those that provide services to the company, such as
their directors, officers, and employees.
A private company also has several advantages. It
has no requirement to publicly disclose much, if any financial
information; such information could be useful to competitors. For
example, Form 10-K is an annual report required by the SEC each year
that is a comprehensive summary of a company's performance. Private
companies do not file form 10-Ks. It is less pressured to "make the
numbers"—to meet quarterly projections for sales and profits, and
thus in theory able to make decisions that are best in the long-run.
It spends less for certified public accountants and other
bureaucratic paperwork required of public companies by government
regulations. For example, the Sarbanes-Oxley Act in the United
States does not apply to private companies. The wealth and income of
the owners remains relatively unknown by the public.
One disadvantage of a private company is that
while private companies may also issue their securities as
compensation for services, the recipients of those securities often
have difficulty selling them on the open market. Securities from a
public company typically have an established fair market value at
any given time as determined by the price the security is sold for
on the stock exchange where the security is traded.
The norm is for new companies, which are
typically small, to be privately owned. After a number of years, if
a company has grown significantly and is profitable, or has
promising prospects, there is often an initial public offering which
converts the private company into a public company or an acquisition
of a company by public company.
However, more and more entrepreneurs are
structuring new companies to become public companies from the very
beginning. Raise initial capital through a Private Placement
Memorandum (PPM) with the declared intent to be publicly trading as
soon as possible.
Other companies choose to remain private for a
long period of time after maturity into a profitable company.
Investment banking firm Goldman Sachs and shipping services provider
United Parcel Service (UPS) are examples of profitable companies
which remained private company for many years after maturing into
profitable companies.
Less common, but not unknown, is for a public
company to buy out its shareholders and become private. This is
typically done through a leveraged buyout and occurs when the buyers
believe the securities have been undervalued by investors. Public
companies can also become private by having all of their shares
purchased by an individual or small group of investors, or by
another company that is private.
In addition, one publicly-owned company may be
purchased by one or more publicly-owned companies, with the
bought-out company either becoming a subsidiary or joint venture of
the purchaser(s) or ceasing to exist as a separate entity, its
former shareholders receiving either cash, shares in the purchasing
company or a combination of both. When the compensation in question
is primarily shares then the deal is often considered a merger.
Subsidiaries and joint ventures can also be created de novo - this
often happens in the financial sector. Subsidiaries and joint
ventures of public companies are not generally considered to be
considered private companies (even though they themselves are not
publicly traded) and are generally subject to the same reporting
requirements as publicly-traded companies. Finally, shares in
subsidiaries and joint ventures can be (re)-offered to the public at
any time - firms that are sold in this manner are called spin-outs.
Almost all industrialized nations have enacted
laws and regulations that detail the steps that prospective owners
(public or private) must undertake if they wish to take over a
publicly-traded corporation. This often entails the would-be buyer(s)
making a formal offer for each share of the company to shareholders.
Normally some form of supermajority is required for this sort of the
offer to be approved, but once it happens then usually all
shareholders are compelled to sell at the agreed-upon price and the
company either becomes a subsidiary, ceases to exist or becomes
private.
Trading and valuation
The shares of a public company are often traded on a stock exchange.
The value or "size" of a public company is called its market
capitalization, a term which is often shortened to "market cap".
This is calculated as the number of shares outstanding (as opposed
to authorized but not necessarily issued) times the price per share.
For example, a company with two million shares outstanding and a
price per share of US$40 would have a market capitalization of US$80
million. However, a company's market capitalization should not be
confused with the fair market value of the company as a whole since
the price per share are influenced by other factors such as the
volume of shares traded.
For example, if all shareholders were to
simultaneously try to sell their shares in the open market, this
would immediately create downward pressure on the price the share is
traded for unless there were an equal number of buyers willing to
purchase the security at the price the sellers demand. So, sellers
would have to either reduce their price or choose not to sell. Thus,
the number of trades in a given period of time, commonly referred to
as the "volume" is important when determining how well a company's
market capitalization reflects true fair market value of the company
as a whole. The higher the volume, the more the fair market value of
the company is likely to be reflected by its market capitalization.
Another example of the impact of volume on the
accuracy of market capitalization is when a company has little or no
trading activity and the market price is simply the price at which
the most recent trade took place, which could be days or weeks ago.
This occurs when there are no buyers willing to purchase the
securities at the price being offered by the sellers and there are
no sellers willing to sell at the price the buyers are willing to
pay. While this is rare when the company is traded on a major stock
exchange, it is not uncommon when shares are traded over-the-counter
(OTC). Since individual buyers and sellers need to incorporate news
about the company into their decisions as to what prices they are
willing to accept, a security with few buyers and sellers may have a
market price that does not yet reflect the effect of such news,
simply because those buyers and sellers are not yet aware of the
news or have not yet figured out how it should affect the price. |
