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The Initial Public Offering (IPO) : By, Bo Brown

An Initial Public Offering (IPO) allows a privately held company to issue stock to the public for the first time. Companies pursue IPOs primarily to raise new capital for expansion. While going public provides easier access to future capital and improves acquisition opportunities, it also results in significant expenses, ongoing reporting responsibilities, and loss of full control. The IPO process involves selecting an underwriter, registering with the SEC, printing a prospectus, conducting a roadshow for investors, pricing the securities, and selling the securities. Companies aim to time their IPOs during favorable market conditions.

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32 views16 pages

The Initial Public Offering (IPO) : By, Bo Brown

An Initial Public Offering (IPO) allows a privately held company to issue stock to the public for the first time. Companies pursue IPOs primarily to raise new capital for expansion. While going public provides easier access to future capital and improves acquisition opportunities, it also results in significant expenses, ongoing reporting responsibilities, and loss of full control. The IPO process involves selecting an underwriter, registering with the SEC, printing a prospectus, conducting a roadshow for investors, pricing the securities, and selling the securities. Companies aim to time their IPOs during favorable market conditions.

Uploaded by

nvabhishek
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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The Initial Public Offering (IPO)

By,
Bo Brown
Initial Public Offering (IPO)

Definition: A companys first equity issue made


available to the public.
This issue occurs when a privately held
company decides to go public
Also called an unseasoned new issue.
Why do companies go public?
New capital
Almost all companies go public primarily because they need
money to expand the business
Future capital
Once public, firms have greater and easier access to capital in
the future
Mergers and acquisitions
Its easier for other companies to notice and evaluate a public
firm for potential synergies
IPOs are often used to finance acquisitions
Disadvantages of the IPO

Expensive
A typical firm may spend about 15-25% of the
money raised on direct expenses
Reporting responsibilities
Public companies must continuously file reports with
the SEC and the stock exchange they list on
Loss of control
Ownership is transferred to outsiders who can take
control and even fire the entrepreneur
Is it a good time to do an IPO?

There are clear windows of opportunity that


open and close for IPO issuers
Determinants of suitability:
The general stock market condition
The industry market condition
The frequency and size of all IPOs in the financial
cycle
Outline of the IPO process:

1. Select an underwriter
2. Register IPO with the SEC
3. Print prospectus
4. Present roadshow
5. Price the securities
6. Sell the securities
1. Select an underwriter

An underwriter is an investment firm that acts


as an intermediary between a company selling
securities and the investing public
The underwriter is the principal player in the
IPO
Typically, the underwriter buys the securities for
less than the offering price and accepts the risk
of not being able to sell them
Types of underwriting

Firm commitment underwriting:


The underwriter buys the entire issue, assuming full
financial responsibility for any unsold shares
Most prevalent type of underwriting in the U. S.
Best efforts underwriting:
The underwriter sells as much of the issue as
possible, but can return any unsold shares to the
issuer without financial responsibility
Leading IPO Underwriters

1. Goldman Sachs
2. Morgan Stanley
3. Merrill Lynch
2. Register IPO with SEC

The firm must prepare a registration statement


and file it with the SEC
The registration statement discloses all
material information concerning the corporation
making a public offering
3. Print prospectus

The prospectus is a legal document describing


details of the issuing corporation and the
proposed offering to potential investors
Contains much of the information in the
registration statement
The preliminary prospectus is sometimes
called a red herring
4. Present road-show

The road-show is presented to institutional


investors around the country
The road-show allows firms to raise interest in
the company and thus the price
Allows the firm and its underwriters to gather
information from potential purchasers
5. Price the securities

How much to charge for giving away a part of


the firm is very important to the issuers
The securities are priced based on the value of
the company and expected demand for the
securities
Examples of valuation methods:
Net Present Value
Earnings/Price ratios
6. Sell the securities

A full-fledged selling effort gets under way on


the effective date of the registration statement
A final prospectus must accompany the
delivery of securities
Average IPO returns over last 5 years

1996: 23%
1997: 24%
1998: 37%
1999: 276%
2000: -7%
The End

Any Questions???

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