IPO s
What is an IPO? IPO stands for Initial Public Offering.
• • An IPO happens when a privately owned company issues shares of stock to be sold to the general public.
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What is an IPO? This means the company is no longer privately
owned, • but is owned by a variety of investors, some of whom are not involved with the day-to-day operations of the company – • these investors simply own some of the company's stock, which they purchased on the open market.
• Although IPOs can vary greatly from one company to another, and they require a long, expensive and complicated process, • the IPO is basically a way for the company to make money based on expectations of future success and profit.
Why Have an IPO?
• The obvious reason that any company has an IPO is to raise money.
• Having an IPO is not so much an event as it is a process. • It takes months of planning to prepare a company to go public.
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A board of directors must be assembled, accounts audited for accuracy, consultants and advisers hired. In fact, a whole cast of characters must take the stage to help an IPO happen.
• One of the first things that a company does is that it appoints one or more Investment or Merchant Banks.
• The most important role of Investment bankers is of lead managers and Underwriters. • The lead manager assists the company in all aspects of the issue process like preparing the draft prospectus, organizing Road Shows etc.
• The most important character is probably the underwriter, an investment banker who works for an investment company.
• Underwriters have the distribution channels and business community contacts that can get a company's shares out to the right investors. • They will also help set the initial offering price for the stocks, work to create enthusiasm for the stock, and assist in creating the prospectus.
• The underwriting deal is structured in a variety of ways. • In a ‘firm commitment’, the underwriter guarantees a certain minimum amount that will be raised by buying the entire offer and selling it to the public.
• In a ‘Best Efforts’ agreement, the underwriter sells the securities for the company but does not guarantee the amount that will be raised.
• There can be a syndicate of Underwriters where one underwriter leads the syndicate and the others sell part of the issue.
Prospectu s
• The prospectus is an important document that describes the company in great detail to potential investors.
• Once the prospectus has been drafted, it is reviewed by the SEC. • SEC approval only means that the prospectus follows the regulations for such documents -- it says nothing about the quality or future profitability of the company.
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Road show Following SEC approval, company executives go on the road
show, otherwise known as the dog-and-pony show. • This is a tour of major cities and cities where important brokerage houses have their headquarters. • At these invitation-only slide shows (a few elite investors will even get one-on-one presentations), potential investors are given "goodie bags" containing calendars, pens, samples of the company's product, • and whatever else might help investors think favorably about the company.
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The Day of the IPO The day before the stocks are issued, the underwriter and
the company must determine a starting price for the stocks. • A target price will have been set early on in the process, but IPOs are rarely stable.