IPO Best Way to Enter Capital Market

IPO (Initial Public Offering) referred to simply as an "offering" or "flotation", is when a company (called the issuer) issues common stock or shares to the public for the first time. They are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately owned companies looking to become publicly traded.

In an IPO the issuer obtains the assistance of an underwriting firm, which helps determine what type of security to issue (common or preferred), best offering price and time to bring it to market.

Reasons for listing

When a company lists its securities on a public exchange, the money paid by investors for the newly-issued shares goes directly to the company (in contrast to a later trade of shares on the exchange, where the money passes between investors).

An IPO, therefore, allows a company to tap a wide pool of investors to provide it with capital for future growth, repayment of debt or working capital. A company selling common shares is never required to repay the capital to investors.

Once a company is listed, it is able to issue additional common shares via a secondary offering, thereby again providing itself with capital for expansion without incurring any debt. This ability to quickly raise large amounts of capital from the market is a key reason many companies seek to go public.

Benefits of an IPO

There are several benefits to being a public company, namely:

•             Bolstering and diversifying equity base

•             Enabling cheaper access to capital

•             Exposure, prestige and public image

•             Attracting and retaining better management and employees through liquid equity participation

•             Facilitating acquisitions

•             Creating multiple financing opportunities: equity, convertible debt, cheaper bank loans, etc.

•             Increased liquidity for equity holder

Disadvantages of an IPO

There are several disadvantages to completing an initial public offering, namely:

•             Significant legal, accounting and marketing costs

•             Ongoing requirement to disclose financial and business information

•             Meaningful time, effort and attention required of senior management

•             Risk that required funding will not be raised

•             Public dissemination of information which may be useful to competitors, suppliers and customers

Procedure

IPOs generally involve one or more investment banks known as "underwriters". The company offering its shares, called the "issuer", enters a contract with a lead underwriter to sell its shares to the public. The underwriter then approaches investors with offers to sell these shares.

The sale (allocation and pricing) of shares in an IPO may take several forms. Common methods include:

•             Best efforts contract

•             Firm commitment contract

•             All-or-none contract

•             Bought deal

•             Dutch auction

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