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Simarleen Kaur 0424

1. An initial public offering (IPO) refers to the process where a private company offers shares of its stock to the public for the first time. This allows the company to raise capital from public investors. 2. Before an IPO, a company is private and has a small number of shareholders. An IPO provides access to raising significant funds to grow. It also increases transparency and credibility which can help the company obtain better financing terms. 3. The first modern IPO was conducted by the Dutch East India Company. IPOs allow companies to raise funds from public investors. Over time, IPO activity has fluctuated with economic conditions and different sectors have seen ups and downs in IPOs

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38 views4 pages

Simarleen Kaur 0424

1. An initial public offering (IPO) refers to the process where a private company offers shares of its stock to the public for the first time. This allows the company to raise capital from public investors. 2. Before an IPO, a company is private and has a small number of shareholders. An IPO provides access to raising significant funds to grow. It also increases transparency and credibility which can help the company obtain better financing terms. 3. The first modern IPO was conducted by the Dutch East India Company. IPOs allow companies to raise funds from public investors. Over time, IPO activity has fluctuated with economic conditions and different sectors have seen ups and downs in IPOs

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simar leen
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Kaur 1

Simarleen kaur

30 April 2023

IPO - Initial Public Offer

1) What Is an Initial Public Offering (IPO)?

An initial public offering (IPO) refers to the process of offering shares of


a private corporation to the public in a new stock issuance for the first time.
An IPO allows a company to raise equity capital from public investors.

The transition from a private to a public company can be an important time for
private investors to fully realise gains from their investment as it typically
includes a share premium for current private investors. Meanwhile, it also
allows public investors to participate in the offering. After the IPO, shares are
traded freely in the open market at what is known as the free float. Stock
Exchanges stipulate a minimum free float both in absolute terms (the total
value as determined by the share price multiplied by the number of shares
sold to the public) and as a proportion of the total share capital (i.e., the
number of shares sold to the public divided by the total shares outstanding).
Although IPO offers many benefits, there are also significant costs involved,
chiefly those associated with the process such as banking and legal fees, and
the ongoing requirement to disclose important and sometimes sensitive
information.

2) How an Initial Public Offering (IPO) Works?

Before an IPO, a company is considered private. As a pre-IPO private


company, the business has grown with a relatively small number of
shareholders including early investors like the founders, family, and friends
along with professional investors such as venture capitalists or angel
investors.
An IPO is a big step for a company as it provides the company with access
to raising a lot of money. This gives the company a greater ability to grow
and expand. The increased transparency and share listing credibility can
also be a factor in helping it obtain better terms when seeking borrowed
funds as well.

When a company reaches a stage in its growth process where it believes it


is mature enough for the rigours of SEC regulations along with the benefits
and responsibilities to public shareholders, it will begin to advertise its
interest in going public.
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Typically, this stage of growth will occur when a company has reached a
private valuation of approximately $1 billion, also known as unicorn status.
However, private companies at various valuations with strong
fundamentals and proven profitability potential can also qualify for an IPO,
depending on the market competition and their ability to meet listing
requirements.

IPO shares of a company are priced through underwriting due diligence.


When a company goes public, the previously owned private share
ownership converts to public ownership, and the existing private
shareholders’ shares become worth the public trading price. Share
underwriting can also include special provisions for private to public share
ownership.

Meanwhile, the public market opens up a huge opportunity for millions of


investors to buy shares in the company and contribute capital to a
company’s shareholders' equity. The public consists of any individual or
institutional investor who is interested in investing in the company.

Overall, the number of shares the company sells and the price for which
shares sell are the generating factors for the company’s new shareholders'
equity value. Shareholders' equity still represents shares owned by
investors when it is both private and public, but with an IPO, the
shareholders' equity increases significantly with cash from the primary
issuance.

3) History of IPOs

The term initial public offering (IPO) has been a buzzword on Wall Street
and among investors for decades. The Dutch are credited with conducting
the first modern IPO by offering shares of the Dutch East India
Company to the general public.

Since then, IPOs have been used as a way for companies to raise capital
from public investors through the issuance of public share ownership.

Through the years, IPOs have been known for uptrends and downtrends in
issuance. Individual sectors also experience uptrends and downtrends in
issuance due to innovation and various other economic factors. Tech IPOs
multiplied at the height of the dot-com boom as startups without revenues
rushed to list themselves on the stock market.

The 2008 financial crisis resulted in a year with the least number of
IPOs. After the recession following the 2008 financial crisis, IPOs ground
to a halt, and for some years after, new listings were rare. More recently,
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much of the IPO buzz has moved to a focus on so-called unicorns—


startup companies that have reached private valuations of more than $1
billion. Investors and the media heavily speculate on these companies and
their decision to go public via an IPO or stay private.

4) Advantages and Disadvantages of an IPO

The primary objective of an IPO is to raise capital for a business. It can


also come with other advantages as well as disadvantages.

• Advantages
1. One of the key advantages is that the company gets access to
investment from the entire investing public to raise capital. This
facilitates easier acquisition deals (share conversions) and increases
the company’s exposure, prestige, and public image, which can help
the company’s sales and profits. Increased transparency that comes
with required quarterly reporting can usually help a company receive
more favorable credit borrowing terms than a private company.
.
• Disadvantages

1. Companies may confront several disadvantages to going


public and potentially choose alternative strategies. Some of
the major disadvantages include the fact that IPOs are
expensive, and the costs of maintaining a public company are
ongoing and usually unrelated to the other costs of doing
business.
2. Fluctuations in a company's share price can be a distraction
for management, which may be compensated and evaluated
based on stock performance rather than real financial results.
Additionally, the company becomes required to disclose
financial, accounting, tax, and other business information.
During these disclosures, it may have to publicly reveal secrets
and business methods that could help competitors.

Pros
• Can raise additional funds in the future through secondary offerings
• Attracts and retains better management and skilled employees
through liquid stock equity participation (e.g., ESOPs)
• IPOs can give a company a lower cost of capital for both equity and
debt
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Cons

• Significant legal, accounting, and marketing costs arise, many of


which are ongoing.
• Increased time, effort, and attention required of management for
reporting.
• There is a loss of control and stronger agency problems.

Works cited
1. https://www.investopedia.com/terms/i/ipo.asp
2. https://en.m.wikipedia.org/wiki/Initial_public_offering
3. https://m.economictimes.com/definition/ipo/amp
4. https://www.fidelity.com/learning-center/trading-
investing/trading/investing-in-ipos

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