Finance & Investment

Learn Finance with CA – All You Need to Know About an Initial Public Offering (IPO)

An initial public offering, or IPO, is the very first sale of stock issued by a company to the public. Prior to an IPO the company is considered private, with a relatively small number of shareholders made up primarily of early investors (such as the founders, their families and friends) and professional investors (such as venture capitalists or angel investors). The public, on the other hand, consists of everybody else – any individual or institutional investor who wasn’t involved in the early days of the company and who is interested in buying shares of the company. Until a company’s stock is offered for sale to the public, the public is unable to invest in it. You can potentially approach the owners of a private company about investing, but they’re not obligated to sell you anything. Public companies, on the other hand, have sold at least a portion of their shares to the public to be traded on a stock exchange. This is why an IPO is also referred to as “going public.”

Why Have an IPO?

Why go public, then? Going public raises, a great deal of money for the company in order for it to grow and expand. Private companies have many options to raise capital – such as borrowing, finding additional private investors, or by being acquired by another company. But, by far, the IPO option raises the largest sums of money for the company and its early investors.

Some of the top IPOs of 2018 include:

Anaplan: Anaplan, a software company went IPO on the 12th of October, 2018. Despite tough market conditions, shares popped as much as 43% to $24.30 on debut trading valuing the company at nearly $3 billion, the IPO price was set at $17 per share and issued 15.5 million shares.

Survey Monkey: The online polling company went IPO on the 26th of September, 2018 with its stock price closing up 44% from its initial price. The company sold 15 million shares at $12 per share higher than the expected $9-$11 per share.

Farfetch: The online retail company floated on the NYSE on the 21st of September, 2018 at $27, up 35% on its opening price of $20 valuing the company at $5.8 billion.

Eventbrite:The Ticketing site, Eventbrite had a superb opening day at the NYSE on September 20, 2018 with its price surging by as much as 70% valuing the company at close to $3 billion. The shares trading at $36 per share up from its per share valuation of $23 per share. It closed the trading day at $36.50 per share.

NIO: the Chinese electric car maker and fast rising Tesla rival had an unamazing debut at the NYSE on 12th October, 2018. Stock opened below valuation price at $6.26 a share before falling by as much as 15% before rebounding to close at +5.4%. the company was valued at $6.4 billion.

Sonos: The connected Speaker maker Sonos went IPO on the 2nd August, 2018 with shares popping 20% to close at $19.91 a share valuing the company at $2.4 billion.

Xiaomi: The Chinese smart phone maker disappointed in its Hong Kong Stock Exchange debut in what was expected to be the biggest Chinese IPO since Alibaba. Xiaomi priced its IPO at HK$17 cutting its valuation roughly in half to about US$54 billion. It opened trading on the 9th of July down 2% and by as much as 6% during the first day.

Pros and Cons of an IPO

Pros:

  • A large, diverse group of investors to raise capital
  • Gives the company a lower cost of capital
  • Increase the company’s exposure, prestige, and public image, which can help the company’s sales and profits
  • Public companies can attract and retain better management and skilled employees through liquid equity participation (e.g. ESOPs)
  • Facilitating acquisitions (potentially in return for shares of stock)
  • Raises the largest amount of money for the company compared to other options

Cons:

  • Company becomes required to disclose financial, accounting, tax, and other business information
  • Significant legal, accounting and marketing costs, many of which are ongoing
  • Increased time, effort and attention required of management for reporting
  • Risk that required funding will not be raised if the market does not accept the IPO price, sending the stock price lower right after the offering
  • Public dissemination of information which may be useful to competitors, suppliers and customers
  • Loss of control and stronger agency problems due to new shareholders, who obtain voting rights and can effectively control company decisions via the board of directors
  • Increased risk of legal or regulatory issues, such as private securities class action lawsuits and shareholder actions

Let’s review some quick tips on IPO

  • An initial public offering (IPO) is the first sale of stock issued by a company to the public.
  • Broadly speaking, companies are either private or public. Going public means a company is switching from private ownership to public ownership, where public shareholders get the right to vote in company decisions.
  • Private companies typically have a small number of closely knit shareholders.
  • Public companies can have thousands of different shareholders.
  • Going public raises cash and provides many benefits for a company.
  • Getting in on a hot IPO is very difficult, if not impossible.
  • The process of underwriting involves raising money from investors by issuing new securities to institutional investors.
  • Companies hire a syndicate of investment banks to underwrite an IPO.
  • The road to an IPO consists mainly of putting together the formal documents for the Securities and Exchange Commission (SEC) and selling the issue to institutional clients.
  • The only way for you to get shares in an IPO is to have a frequently traded account with one of the investment banks in the underwriting syndicate.
  • An IPO company is difficult to analyze in the market because there isn’t a lot of historical info.
  • Lock-up periods prevent insiders from selling their shares for a certain period of time. The end of the lockup period can put strong downward pressure on a stock.
  • Flipping may get you blacklisted from future offerings.
  • Road shows and red herrings are marketing events meant to get as much attention as possible. Don’t get sucked in by the hype.
  • A tracking stock is created when a company spins off one of its divisions into a separate entity through an IPO.
  • Don’t consider tracking stocks to be the same as a normal IPO, as you are essentially a second-class shareholder.

 

 

 

 

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