For many companies issuing of Initial Public Offering, better known as, IPO, is a momentous occasion. However, it takes a lot of planning and expert execution to actually issuing an IPO. The process can be rather confusing, especially, if it involves individuals, who do not have prior experience. As a guide there are certain steps which are to be followed by the company members to ensure smooth issuance of Initial Public Offerings. In this article, you will find the basics of IPO, and details of the various steps involved in the process.
IPO or Initial Public Offering is the first sale of stock issued by any company to the public. A company has some benefits that are fortified once, and it goes public. Like in the United States, it is not easy to find private companies. But, like MARS CANDY, IKEA, HALLMARK CARDS- these companies are private companies whose owners do not have to disclose much accounting or financial information about the company.
Some examples are as follows:
- General Motors or GM has raised $18.15 billion in 2010.
- AIG or American Insurance Group has raised $20.5 billion in 2006.
- FB or Facebook has raised $16.01 billion in 2012.
- Alibaba group has raised $25 billion in 2014.
Now the question is that what are the benefits of this IPO (INITIAL PUBLIC OFFERING)?
- An IPO can help raise substantial capital for the company. As a result of this, IPO is one of the most preferred routes to raise capital for many private companies.
- An IPO can enhance the company’s public image, act as a marketing tool, serve as a matter of prestige and provide exposure to the company. These factors are vital for a company to acquire more business.
- An IPO aids in maintaining the cost of capital for a business enterprise.
- IPO’s can enable companies to offer stock options to its employees as a form of incentive towards motivating and retaining top talent within the company.
- IPOs can aid future mergers and acquisitions.
- IPO helps to make a balance between the stock market and the economy’s health. If the numbers of IPO’s are increasing, it means the economy is up to the mark right now, and the company is growing on its own feet.
Now the question is that what should be the steps for issuing that a company should follow before releasing an IPO (INITIAL PUBLIC OFFERING)?
- SELECT AN INVESTMENT BANK-
The first choice of an investment bank which can give the advice to any company on its IPO and provide underwriting services. The selection of an investment bank depends on the following factors like-
- Have a prior relationship with the investment bank.
- Researching quality.
- It helps to provide the issued securities to more individual investors.
- Industry expertise.
- PRICING- after the approval of IPO (INITIAL PUBLIC OFFERING), the effective date is being decided. Along with this one question can come like why the pricing is the big factor? Because it depends on that pricing amount, the issuing company will raise its capital. After that, money raised through the sale of shares the company.
The benefits are as follows:
- it helps to achieve the company’s goal or target
- Coordinate and maintain the interrelationship between every professional.
- Helps to increase the market economy along with that it gives a proper description of the success and failure of the road shows.
These are the reason behind, IPO’s (INITIAL PUBLIC OFFERING) are underpriced which can ensure that issue is subscribed or oversubscribed by any public investor if it is oversubscribed 2 to 3 times that will be considered as GOOD IPO (INITIAL PUBLIC OFFERING).
- STABILIZATION- During this stabilisation period, the underwriter can get the freedom to influence the price of the issue against price manipulation is suspended. By this process, the underwriter has to provide analyst recommendation which can create a market for stock issued.
- DUE DILIGENCE AND REGULATORY FILINGS- There are different underwriting arrangements which are available to the issuing company like-
- Like the firm commitment which is one of the common underwriting arrangements because it guarantees the issuing company to raise a particular sum of money which can be increased. For that reason, the firm commitment is the best arrangement step which can follow by any company before issuing an IPO (INITIAL PUBLIC OFFERING).
- The second one is the best efforts arrangements which can sell the securities on behalf of the company.
- Under the syndicate of underwriters, the investment bank can form a syndicate of underwriters after forming a syndicate of underwriters with other banks. When can it arise? At that time when the investment bank diversifies the risk of an IPO out of multiple banks.
There should have some documents which an underwriter must draft as well like-
- ENGAGEMENT LETTER- This is divided into two parts like reimbursement clause and gross spread or underwriting discount. By the first one (reimbursement clause) issuing company can cover them all out of the pocket expenses which is incurred by the underwriter. The second one is the gross price which means sale price with the issue sold by the underwriter-purchase price of the issue bought by the underwriter.
- LETTER OF INTENT- The letter of intent contains the following information like- the underwriter commitments, a commitment by the issuer company and an agreement by the issuing company. These entire things provide 15% to 20% of overallotment options.
- TRANSITION OF MARKET COMPETITION– This is the final stage of IPO (INITIAL PUBLIC OFFERING) During this time, the underwriters assume the contributions of the advisors. During the 25 days, underwriters can provide the estimates about the earnings and valuation of the issuing company.
These guidelines are beneficial which must undertake to go public and very much essential for a company to follow before issuing an IPO as well. After this IPO (INITIAL PUBLIC OFFERING), every company becomes a renowned company or publicly listed company, and that is why IPO(INITIAL PUBLIC OFFERING) is also known as GOING PUBLIC. These steps are the overview of the entire IPO process which has some unique appeal of its own and without following those steps a company is unable to generate its revenue and profitability as well.