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The Initial Public Offering (IPO) Introduction

The Initial Public Offering (IPO) Introduction

The Initial Public Offering (IPO) Introduction

Definition: A company’s first equity issue made available to the public.

Going public is a monumental decision for any company. It forever changes how a company goes about doing business. A public company has access to more, and often deeper, sources of capital than a private company. The actual process of going public can be time-consuming and presents certain unique challenges that a company should be prepared to undertake.

Why do companies go public?

New capitalAlmost all companies go public primarily because they need money to expand the business.

Increased capital. Raised capital can be used as working capital, acquisitions, research and development, marketing, and expanding plant and equipment.

Future capital. Once public, firms have greater and easier access to capital in the future

International recognition

Liquidation of the shares of the company so that the founders and the rest of the existing shareholders will be able to “cash out“.

Expansion of the company into new territories not only by means of more funding, but also by regulatory or marketing reasons . Being public is associated with credibility and accountability.

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
  • Expansion of the company either by acquisition or merger.

Transparency, accountability and credibility

To attract and retain talented employees and enhance the company talents pool or human capital development.

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 Security Commission 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 IPO’s in the financial cycle

What sort of qualifying criteria?

  • An attractive product or service, preferably one with a competitive advantage and sufficiently large market;
  • An experienced management team;
  • A positive trend of historical financial results;
  • Favourable financial prospects;
  • A well-thought-out, focused business plan;
  • Strong financial, operational, and compliance controls.

Outline of the IPO process:

  1. Select an underwriter & merchant banker
  2. Appoint the reporting accountant and legal counsel for due diligence
  3. Register IPO with the Securities Commission
  4. Print prospectus
  5. Present roadshow for book building
  6. Price the securities
  7. Sell the securities
Capital Team