IPO: Initial Public Offering
IPO, that is initial public offering in the exchange, is the event following which a company becomes public. After the IPO, the company’s shares are available for purchase to an unlimited number of persons.
Initial public offering is held to boost liquidity of the company’s share capital and attract long-term financial resources. In fact, stock sale to third-party companies or persons is a transfer of a part of the ownership of a company. Received funds may be used at once. For example, a company may invest these funds in working capital financing, deleveraging, buy additional production facilities, or realise long-term projects.
IPO also enables to get protected from takeover by larger players or competitors. After the initial public offering, maintaining this operation is much more costly and difficult. Another advantage of IPO in some countries is protection from unlawful acts by raiders and officials.
Initial public offering ensures market capitalisation for a company. An objective assessment of the company’s value is performed. It is well known that banks prefer to credit companies after IPO, as they can do this against a pledge of shares.
Through free stock sale, shareholder equity of the company is increased. At this, shares may be used as means of payment and a pledge for attracting debt financing. Other market players may also be bought for shares.
IPO takes place in several stages.
- First of all, financial performance of the company is assessed. Experts look for weak points which may discourage potential investors. An intense work on the image is carried out.
- After the pre-preparation, the company has to employ lawyers, advisors and attract investment banks. A package of documents, particularly an investment memorandum, is prepared in which the number of the distributed shares, the price of each of them, perspectives of monetary investments, and expected dividends are indicated.
- The trading platform where shares will be placed is also selected. At the same time, the promotion campaign is enhanced.
- Actually, after this, the offering takes place. Investors’ bids for share purchase are collected and satisfied. Then shares are issued in the selected exchange.
- The final stage is measuring success of the IPO. Outside specialists analyse price dynamics and define traded values, draw relevant conclusions.
The major IPO disadvantages are: time wasting, strict requirements to the company’s size on the part of the platform, and additional expenses. Apart from that, a company should necessarily disclose its information.