- Posted February 23, 2013 by
What is IPO and why our company needs it?
An initial public offering, or IPO, is the first sale of a company’s stock to the public. It is considered a milestone event for entrepreneurial companies, signaling to the world that the company has made it as a business. “Going public” with an IPO provides benefits but also imposes certain burdens on the company. Individual investors rarely get in on IPOs but can buy into the stock as soon as it starts public exchange trading.A company can raise money by issuing either debt or equity. If the company has never issued equity to the public, it's known as an IPO.
Why go public?
Companies go public with an IPO to raise money by issuing stock. A public company gains access to capital to fuel further growth and provide liquidity. An IPO also gives the company the prestige of being publicly traded, which may help it in its commercial relationships. Going public can help the company attract new talent by offering stock options, and it rewards initial investors with liquidity. A successful IPO and subsequent solid market performance means the company may find a receptive market for future stock issues. An IPO also generates publicity for the company and its products or services.It is the process in which a large company issues shares to the general public for the first time to raise cash and capital for its expansion and business usage. == Answer == There are two basic ways to raise money for something like an expansion: selling part of the equity of the company through a stock sale, and creating debt by selling bonds. There are advantages and disadvantages to both. In the case of selling equity, the major disadvantage is the loss of some of your autonomy. Investors hate to lose money, and want to make sure you're doing what it takes to make money. The upside is once you've sold the stock, you don't necessarily have any further expenditures. A lot of companies, especially high-tech ones, don't pay dividends. Also, dividends are paid out of after-tax profits. If you sell bonds, you must pay interest on time or risk default. The tradeoff here is there's not much loss of autonomy, and bond interest payments come out of pre-tax income.
The big downside for a company that goes public is loss of control over the company’s direction. Public companies face intense pressure to meet short-term earnings estimates of market analysts, which can make it tougher to manage the company for long-term growth. Public companies also are required to disclose sensitive information about themselves, their operations and plans, and their products and services to securities regulators and the investing public at the time of the IPO and periodically thereafter. There is the risk that a bad performance in the stock market will create negative publicity. And there is a risk that dissident stockholders can buy up enough shares to wrest control of the company away from its founders.
The company doing an IPO selects an underwriting syndicate made up of groups of investment banks or brokerages to handle the IPO. The underwriting syndicate buys the stock issue from the company and resells the shares to initial investors, who in turn start exchange trading in the stock. An underwriter seeks a quick turnaround and would rather sell 1 million shares to one investor than sell 1,000 shares to 1,000 investors. For this reason, IPO shares normally are offered first to the big players, like major brokerages, hedge funds and institutional investors, that buy huge blocks of shares.
Effect on Investors
Individual investors normally don’t get in on good IPOs. If a new issue is particularly hot, retail brokers may only have a limited number of IPO shares. That means brokers will decide which clients are offered these shares based on factors such as cash balance, trading frequency, overall net worth, risk tolerance and investment objectives. Small investors will get their chance to buy into the stock once it starts trading on a stock exchange. Waiting for exchange trading may be a wise move for smaller investors since IPO stocks often drop below their initial offering price shortly after they start trading in the stock market.
Totally, An initial public offering (IPO), sometimes called a flotation, is a sale of a company's securities to the investing public on a stock exchange. The securities, primarily common shares, are being admitted to the exchange's listing, and then can be traded on the stock exchange's floor or on its computer trading system.
Calculating the price of an IPO means determining the price at which the shares would be sold to the investing public.
How to calculate IPO and what can we do for it?
1) Find an investment bank that will help you through your initial public offering. The investment bank will help you find the right stock exchange to list on, fulfill all its listing requirements, and negotiate with investors for the price of your shares.
2) Work with your investment bank to get an initial estimate of how much your business is worth. There are three primary ways in which you can value a business. You can look at how much the shares of public companies similar to your firm in size and scope cost. You can deduct the valuation range for your company by analyzing the prices paid for acquisitions of similar companies. You can also get a valuation estimate by determining how much revenue your company will generate in the future (the NPV or net present value analysis).
3) Choose the stock exchange on which to float your shares and prepare all the necessary documents. Your investment bank will advise you what stock exchange is best for you and how to fulfill its listing requirements.The main document in any IPO is a prospectus. It is essentially a business plan of your company that also includes information about your IPO, including the type of securities being sold to the investing public and its price (the price at this point is being left blank)
4) Send your draft prospectus (a finished prospectus but without the price of securities issued) to institutional investors that might be interested in buying shares of your company. Your investment bank will help you conduct "roadshows"--presentations and meetings with interested investors.
5) Determine the price of your shares at IPO through negotiations involving you, interested investors, your investment bank, and stock exchange representatives. Usually the price is a little lower than your valuation estimates to encourage investors to buy the stock, hoping it will increase in value.
6) Fill in the price of the shares you will sell at your IPO in your prospectus, and submit it with other documents to the stock exchange and the relevant regulator (Securities and Exchange Commission in the U.S.). Your stock exchange will admit the shares of your company to its listing, and trade in your shares on the stock exchange will commence.
I hope that this information will be useful for all companies and individual investors who will take much knowledge from this article.
By Irakli Berdzenadze
Personal Financial and Investment Consultant
Global Partner of Bauhaus Capital Partners in Kuwait, Qatar, UAE and Turkey
Call: +17187172164; +37254700725; +995577227878
Personal Financial and Investment Consultant Irakli Berdzenadze is a global Financial and Investment Consultant operating in 14 world destination: USA, Canada, Brazil, UK, Turkey, Russia, UAE, Kuwait, Qatar, Saudi Arabia, Egypt, Hon Kong, Singapore, India and he is a Global Partner of Bauhaus Capital Partners in UAE, Kuwait, Qatar and Turkey. Total managed and consulted portfolio is 571 million USD.