Initial Public Offering (IPO, Initial Public Offering)
What is an initial public offering?
Initial Public Offering (IPO, Initial Public Offering) - The first public sale of the company's shares by public subscription or sale to shareholders of a private company. This necessarily implies that the company further withdraws its stocks to the exchange for purchase by an unlimited number of persons.
Why is there an initial public offering?
The purpose of the initial public offering - attracting additional capital to the company, improving the company's image, as well as assessing the quality of management and the firm's work, the possibility of increasing the income from the company's existing shares through the purchase and sale of part of these assets by investors, obtaining dividendsIn some cases, it is an opportunity to reduce the risk of a company being taken over by raiders.
After the IPO all of the company's activities become public, which has a positive effect on the company's prestige and name.
What is the essence of an initial public offering?
Before the IPO, shares are traded on the over-the-counter market, i.e. transactions for the purchase and sale of securities are made individually, privately, at subjective prices. With the advent of shares on the stock exchange there are many more buyers and sellers, quotations become official and the value becomes the same for all (which is determined as a result of market demand and supply).
How does the IPO go?
To get the most out of an initial public sale of stock, an organization needs a whole set of measures to prepare for it.
Preliminary stage
It consists of assessing the financial performance of companies in order to find the weakest places that can scare away potential investors. The company improves its performance and strengthens its financial position. When everything is ready, you can proceed directly to preparation.
Preparatory phase
The preparatory stage consists of several steps:
- The search for partners (consultants - law firms, brokers, underwriters - investment companies, which often buy shares after the IPO), with whom the plan is coordinated, the choice of the site for trading, listing (the procedure for admission to trading on the stock exchange, you must meet several conditions).
- Drawing up formal documents (registration of securities prospectus, etc.)
- Creating an investment memorandum - a document that provides all the necessary information for the investor (stock prices, the company's dividend policy, etc.)
- The launch of an advertising campaign, including in the form of a "roadshow" (advertising trips to major cities of management in order to present the company - common in the West), introducing potential investors, etc., aimed at the formation of the book of applications.
Main stage
Includes collection of bids for offered securities, setting prices (if not done earlier) taking into account bids received, satisfying bids, summing up
The final stage
Shows the effectiveness of the placement, looks at the volume of trades, price dynamics (in combination with free-float, liquidity), etc.
What does the initial public offering of a company provide?
The main reason private business owners decide to become publicly traded companies is that an initial public offering will bring in impressive amounts of money. Often the former owners become billionaires in one day of the IPO! But in addition to the money, an IPO opens up a number of other opportunities and privileges, such as:
- Since public companies' finances and accounting are under close scrutiny of special services, financial institutions trust JSCs more and, accordingly, can offer more favorable terms
- the company can issue more shares (and get even richer)
- you can settle your shares (in large deals or mergers) without actually spending any money
It is also worth noting that the stock exchange on which a company's stock is traded also determines a kind of prestige. If a stock is traded on New York Stock ExchangeIf we are not sure of the names of the regional exchanges, then it is considered much more prestigious than on any regional exchange (of which we do not know the names).