An initial public offering, or IPO, is the first sale of stock by a company to the public. 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. The first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking the capital to expand, but can also be done by large privately owned companies looking to become publicly traded. In an IPO, the issuer obtains the assistance of an underwriting firm, which helps it determine what type of security to issue, the best offering price and the time to bring it to market.
The primary advantage a small business stands to gain through an initial public stock offering is access to capital. In addition, the capital does not have to be repaid and does not involve an interest charge. The only reward that IPO investors seek is an appreciation of their investment and possibly dividends. The main advantages of a public company are:
1. Access to capital to fund growth
Public placement of shares on a stock exchange allows the company to attract capital to fund both organic growth and acquisitive expansion. If retained earnings and debt funding are insufficient, IPO becomes one of the most realistic and convenient ways to secure the continuing growth of the business. It provides access to a massive, timeless pool of capital and boosts the investment credibility of the business.
2. Creation of liquidity and potential exit for the current owners
Formation of a public market for the company’s shares at fair price creates liquidity and provides an opportunity to sell the shares promptly with minimal transactional costs. The private owners of the company can dispose of their stakes in the business both during an IPO and at a later stage.
3. Maximum value of the company
Normally, an IPO is an offer to a large number of institutional and retail investors to become shareholders of the company. The very multitude of large investors and their confidence in the liquidity of their investment in a public entity assure the current owners of a private company about achieving the maximum possible valuation of the business at the time of an IPO or afterwards.
4. Enhancement of the company’s public profile
Listing on a recognized stock exchange means that the business will receive wide media coverage, usually a very favorable one, thus increasing the company’s visibility and recognition of its products and services. The company’s activities will also be reflected in the reports by professional financial analysts. Such public profile supports liquidity of the shares and contributes to the expansion of the business contacts. It also helps to increase confidence among the company’s business partners.
5. Improvement in debt finance terms
For domestic financial institutions – used to working with the low-transparency businesses and often inadequate financial reporting – a company listed on a recognized stock exchange becomes a desirable and reliable partner. Banks are often ready to extend loans to public companies in larger amounts, under smaller collateral, for longer maturities and with lower interest rates. Even the largest and most prestigious banking institutions are keen to work with public companies – whose transparency and corporate governance serve as additional factors of confidence for banks and other suppliers of credit.
6. Extra assurances for partners, suppliers and clients
Partners and contractors of a public company feel more confident about its financial state and organisational capabilities as compared to those of a non-transparent private business. Partners take additional comfort in the fact that the public company has gone through rigorous legal, financial and corporate due diligences – all of which are required for a successful completion of an IPO. Confidence among partners and contractors is a sound foundation for stable and predictable business relations with the public company, and allows the latter to obtain additional leverage in negotiating better terms for doing business.
7. Enhanced loyalty of key personnel
Publicly available information about the share price of a public company allows development of employee motivation schemes based on partial remuneration of staff in the form of participation in the equity capital (for example, share options). Equity-based incentive schemes stimulate the key personnel to become more efficient in their work in order to support the company’s growth rates and profitable development – which in turn increase the operational and financial efficiency of the company and its market value.
8. Superior efficiency of the business
Conduct of various due diligences during the IPO process requires a thorough and comprehensive analysis of the company’s business model. During the IPO implementation process, certain internal changes take place, including modification of the organisational structure; selection of the key personnel and delegation of responsibilities; improvement of internal reporting and controls; as well as critical evaluation of the efficiency of the entire business. Normally, such extensive internal efforts result in significant improvements of the communication system, management and controls; they also help eliminate any previously hidden shortcomings in the internal functioning of the business.
The biggest disadvantages involved in going public are the costs and time involved. Experts note that a company's man agement is likely to be occupied with little else during the entire IPO process, which may last as long as two years. The small business owner and other top managers must prepare registration statements for the SEC, consult with investment bankers, attorneys, and accountants, and take part in the personal marketing of the stock. Many people find this to be an exhaustive process and would prefer to simply run their company. The underwriter must make sure that it sells the entire issue. An IPO is deemed successful if the entire issue is sold and its price jumps when it starts trading. The best way to achieve those goals is to generate investor demand by limiting the number of shares offered in an IPO and by setting the subscription price sufficiently low.
An initial public offering (IPO) is the first sale of stock by a company. Small companies looking to further the growth of their company often use an IPO as a way to generate the capital needed to expand. Although further expansion is a benefit to the company, there are both advantages and disadvantages that arise when a company goes public.
There are many advantages for a company going public. As said earlier, the financial benefit in the form of raising capital is the most distinct advantage. Capital can be used to fund research and development, fund capital expenditure or even used to pay off existing debt. Another advantage is an increased public awareness of the company because IPOs often generate publicity by making their products known to a new group of potential customers.
Subsequently this may lead to an increase in market share for the company. An IPO also may be used by founding individuals as an exit strategy. Many venture capitalists have used IPOs to cash in on successful companies that they helped start-up.
Even with the benefits of an IPO, public companies often face many new challenges as well. One of the most important changes is the need for added disclosure for investors. Public companies are regulated by the Securities Exchange Act of 1934 in regard to periodic financial reporting, which may be difficult for newer public companies. They must also meet other rules and regulations that are monitored by the Securities and Exchange Commission (SEC). More importantly, especially for smaller companies, is the cost of complying with regulatory requirements can be very high. These costs have only increased with the advent of the Sarbanes-Oxley Act. Some of the additional costs include the generation of financial reporting documents, audit fees, investor relation departments and accounting oversight committees.
Public companies also are faced with the added pressure of the market which may cause them to focus more on short-term results rather than long-term growth. The actions of the company's management also become increasingly scrutinized as investors constantly look for rising profits. This may lead management to perform somewhat questionable practices in order to boost earnings.
Before deciding whether or not to go public, companies must evaluate all of the potential advantages and disadvantages that will arise. This usually will happen during the underwriting process as the company works with an investment bank to weigh the pros and cons of a public offering and determine if it is in the best interest of the company.
The primary advantage a small business stands to gain through an initial public stock offering is access to capital. In addition, the capital does not have to be repaid and does not involve an interest charge. The only reward that IPO investors seek is an appreciation of their investment and possibly dividends. The main advantages of a public company are:
1. Access to capital to fund growth
Public placement of shares on a stock exchange allows the company to attract capital to fund both organic growth and acquisitive expansion. If retained earnings and debt funding are insufficient, IPO becomes one of the most realistic and convenient ways to secure the continuing growth of the business. It provides access to a massive, timeless pool of capital and boosts the investment credibility of the business.
2. Creation of liquidity and potential exit for the current owners
Formation of a public market for the company’s shares at fair price creates liquidity and provides an opportunity to sell the shares promptly with minimal transactional costs. The private owners of the company can dispose of their stakes in the business both during an IPO and at a later stage.
3. Maximum value of the company
Normally, an IPO is an offer to a large number of institutional and retail investors to become shareholders of the company. The very multitude of large investors and their confidence in the liquidity of their investment in a public entity assure the current owners of a private company about achieving the maximum possible valuation of the business at the time of an IPO or afterwards.
4. Enhancement of the company’s public profile
Listing on a recognized stock exchange means that the business will receive wide media coverage, usually a very favorable one, thus increasing the company’s visibility and recognition of its products and services. The company’s activities will also be reflected in the reports by professional financial analysts. Such public profile supports liquidity of the shares and contributes to the expansion of the business contacts. It also helps to increase confidence among the company’s business partners.
5. Improvement in debt finance terms
For domestic financial institutions – used to working with the low-transparency businesses and often inadequate financial reporting – a company listed on a recognized stock exchange becomes a desirable and reliable partner. Banks are often ready to extend loans to public companies in larger amounts, under smaller collateral, for longer maturities and with lower interest rates. Even the largest and most prestigious banking institutions are keen to work with public companies – whose transparency and corporate governance serve as additional factors of confidence for banks and other suppliers of credit.
6. Extra assurances for partners, suppliers and clients
Partners and contractors of a public company feel more confident about its financial state and organisational capabilities as compared to those of a non-transparent private business. Partners take additional comfort in the fact that the public company has gone through rigorous legal, financial and corporate due diligences – all of which are required for a successful completion of an IPO. Confidence among partners and contractors is a sound foundation for stable and predictable business relations with the public company, and allows the latter to obtain additional leverage in negotiating better terms for doing business.
7. Enhanced loyalty of key personnel
Publicly available information about the share price of a public company allows development of employee motivation schemes based on partial remuneration of staff in the form of participation in the equity capital (for example, share options). Equity-based incentive schemes stimulate the key personnel to become more efficient in their work in order to support the company’s growth rates and profitable development – which in turn increase the operational and financial efficiency of the company and its market value.
8. Superior efficiency of the business
Conduct of various due diligences during the IPO process requires a thorough and comprehensive analysis of the company’s business model. During the IPO implementation process, certain internal changes take place, including modification of the organisational structure; selection of the key personnel and delegation of responsibilities; improvement of internal reporting and controls; as well as critical evaluation of the efficiency of the entire business. Normally, such extensive internal efforts result in significant improvements of the communication system, management and controls; they also help eliminate any previously hidden shortcomings in the internal functioning of the business.
The biggest disadvantages involved in going public are the costs and time involved. Experts note that a company's man agement is likely to be occupied with little else during the entire IPO process, which may last as long as two years. The small business owner and other top managers must prepare registration statements for the SEC, consult with investment bankers, attorneys, and accountants, and take part in the personal marketing of the stock. Many people find this to be an exhaustive process and would prefer to simply run their company. The underwriter must make sure that it sells the entire issue. An IPO is deemed successful if the entire issue is sold and its price jumps when it starts trading. The best way to achieve those goals is to generate investor demand by limiting the number of shares offered in an IPO and by setting the subscription price sufficiently low.
An initial public offering (IPO) is the first sale of stock by a company. Small companies looking to further the growth of their company often use an IPO as a way to generate the capital needed to expand. Although further expansion is a benefit to the company, there are both advantages and disadvantages that arise when a company goes public.
There are many advantages for a company going public. As said earlier, the financial benefit in the form of raising capital is the most distinct advantage. Capital can be used to fund research and development, fund capital expenditure or even used to pay off existing debt. Another advantage is an increased public awareness of the company because IPOs often generate publicity by making their products known to a new group of potential customers.
Subsequently this may lead to an increase in market share for the company. An IPO also may be used by founding individuals as an exit strategy. Many venture capitalists have used IPOs to cash in on successful companies that they helped start-up.
Even with the benefits of an IPO, public companies often face many new challenges as well. One of the most important changes is the need for added disclosure for investors. Public companies are regulated by the Securities Exchange Act of 1934 in regard to periodic financial reporting, which may be difficult for newer public companies. They must also meet other rules and regulations that are monitored by the Securities and Exchange Commission (SEC). More importantly, especially for smaller companies, is the cost of complying with regulatory requirements can be very high. These costs have only increased with the advent of the Sarbanes-Oxley Act. Some of the additional costs include the generation of financial reporting documents, audit fees, investor relation departments and accounting oversight committees.
Public companies also are faced with the added pressure of the market which may cause them to focus more on short-term results rather than long-term growth. The actions of the company's management also become increasingly scrutinized as investors constantly look for rising profits. This may lead management to perform somewhat questionable practices in order to boost earnings.
Before deciding whether or not to go public, companies must evaluate all of the potential advantages and disadvantages that will arise. This usually will happen during the underwriting process as the company works with an investment bank to weigh the pros and cons of a public offering and determine if it is in the best interest of the company.
Good piece of article. BTW I was wondering if there is any specific rule to tag a price for a stock when it is listed with NEPSE and traded on the very first transaction??
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