Reading: Why Go Public?

First, it is important to point out that the process of going public is very expensive and usually takes one to two years.

Direct cost of going public

The following table provides an overview of the average direct costs of going public, grouped by size of the issuing company. The table is from a recent survey that was conducted by PWC and covers 315 firms that went public on the NASDAQ or the NYSE between 2015 and 2017. The IPO costs are split into 5 groups, namely:

• Accounting costs: Primarily fees for external auditors as well as financial reporting advisors
• Legal costs: Primarily fees for securities counsel for drafting the registration statement or for legal due diligence.
• Printing costs: These are costs for document management, SEC filings, and the distribution of the IPO prospectus.
• Other costs: Mostly exchange registration costs and market listing fees.
• Underwriting costs: These are the fees for the investment banks that underwrite the securities and help bring them to the market.

It is apparent from the graph that going public is indeed expensive. For example, for an average firm with revenues of $250 to 500 million, the direct costs of going public are around $22 million! 

• By far the largest cost block are the investment bankers' underwriting fees. These fees generally amount to 4% to 7% of the gross proceeds of the IPO. In the case of a 250-500m revenue company, the typical fee is around 17.4 million or almost 80% of the overall costs (=17.4/22.1).
• Legal costs are generally the second-largest cost block, followed by accounting fees.
• It might be surprising to see that printing is so expensive and amounts to approximately 0.5 million for the typical IPO. First, it is important to note that the distributed documents are generally of very high production quality, which is expensive in itself. Second, what also makes the printing process expensive is the handling of the documents, as it is crucial to ensure confidentiality of the transaction details throughout the production process.

In sum, PWC concludes that the average company incurs "an underwriter fee equal to 4-7% of gross proceeds, plus an additional $4.2 million of offering costs directly attributable to the IPO."

While these numbers are already substantial, it is important to note that they most likely dramatically underestimate the total cost of going public. The reason is (at least) twofold: 

• In addition to these directly measurable costs, companies also have to factor in that going public absorbs a significant amount of management time and tends to "distract" the whole organization. While the associated costs can be substantial, it is very hard to quantify them.
• Finally, it is also important to note that these costs exclude the fact that shares are typically placed on the primary market at a significant discount of 15 - 20%! We will discuss this phenomenon of underpricing in a later section. 

Direct costs of being public

The direct costs of being public are then also non-negligible. According to the same PWC survey cited above, the majority of CFOs believe that being public brings about extra costs of $1 million to $1.9 million per year:

As the bottom part of the graph shows, the main source of these costs of being listed are incremental auditing, financial reporting, legal, and compliance fees.

Clearly, for an IPO to make sense, the issuing company has to expect that the advantages discussed in the preceding section outweigh these direct costs of going and being public.