How Corporations Work: Part 5

This article will be talking about the brief difference between a private and public corporation. Typically, our concept of corporations usually involve public corporations, as these are the most popular, but there’s a whole world of corporations out there.

 

To start off, a private corporation is a corporation whose shares are typically owned by a small circle of people. If anyone wants to buy these shares, then they would have to approach the shareholders, and negotiate a price. Likewise, if anyone wanted to sell their shares, they would have to personally approach other individuals. A simple rule of thumb is that if you want to buy shares of a company, and have to research who to buy them from, then it’s probably a private corporation. An example of a company like this is Uber (as of February 2019).

 

A public corporation is sold actively on public stock exchanges, such as the NYSE or the NASDAQ. Anyone who has enough money could buy shares of a company, and anyone who has shares could sell their shares. Public companies have shares that are valued by the public, i.e. the aggregate of buyers and sellers who are handling those shares. An example of a public company is McDonald’s.

 

The advantage of being a private company is that shareholders typically hold more power, and are not subject to the whims of public traders. An case that happens often is that companies are incentivized to make short term gains and long-term losses when public, because stock prices are highly dependent on quarterly reports, instead of thinking on 10-year horizons. Shareholders may force CEOs to take actions that are not in the best interest of the company’s long-term prospect, but in the interest of shareholders’ immediate financial gain as the stock price goes up temporarily.

 

The advantage of being a public company is usually a higher influx of capital. Usually, public companies have more cash reserves because when shares are open to being sold to the public, the higher amount of buyers leads to an increase in share price. This is simply supply and demand. A private corporation has a fixed amount of demand, and a fixed amount of supply (assuming no dilutions or buybacks of stock). When a corporation goes public, there is more demand, from all the public, and a fixed amount of supply, so the price is bound to go up. Moreover, public companies are now liquid. You will have a much easier time selling stock from a public company for cash than a private company.

 

The transition of a private corporation to a public corporation is simple in theory. The private corporation chooses to go public, and offers shares to a public at a set price. The specific term for this is an Initial Public Offering (IPO). However, in many exchanges, there are set requirements for a company to go public. For example, the NASDAQ requires companies who try to make an IPO on their platform an earnings of at least 11 million pre-tax the past 3 years, at least 27.5 minimum in cash flow in the past 3 years or a market cap of 850 million etc. There are actually multiple ways to satisfy the requirements, but none of them are trivial. Basically, to take a company public, the company typically has to be in a very good position already.

 

Taking a public corporation private is also not easy, but it can be done. Oftentimes, this involves corporation buybacks from public exchanges, or the mass purchase of public stocks by private entities. For example, a hedge fund could take a company private by buying a massive amount of stocks on NYSE, but this means that the company would likely be essentially owned by the hedge fund. Oftentimes, a public corporation going private happens a lot less often than a private corporation going public.

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