What is an IPO?
IPO (Initial Public Offering) is the first public offering of shares, it is the placement and sale of shares (depositary receipts for shares) of a joint—stock company on the securities exchange, the entry of this company into the stock market as a new issuer. At the same time, the company’s securities go on public sale and their purchase / sale can be carried out to an unlimited number of persons.
In principle, everything starts with a business idea, by promoting and strengthening which the organizers turn it into a company producing a certain kind of product, and if far-sighted prospects are seen for all this activity, then there is a chance to attract a larger investment flow by entering an IPO.
Pros and cons of IPO
Due to the IPO, long-term capital is attracted, which does not need to be returned. The issuer may use additional funds to purchase other companies, reduce the debt burden, modernize production or finance new projects.;
only after the IPO does the company truly gain market capitalization. The exact price of the company increases the issuer’s rating and gives him access to cheaper financial resources;
The IPO improves the financial condition of the company. The amount of equity capital increases due to the growth of share capital (sale of shares) and additional capital (issue income). In addition, on prestigious foreign sites, the company’s shares can be used as collateral for obtaining loans. Or instead of money to pay for consulting services and encourage senior and middle managers;
The status of a public company always improves the ratio of borrowed funds to its own. This allows you to attract borrowed capital at lower interest rates;
IPO raises the status of the company. From the point of view of counterparties, if the shares are listed on the stock market, they are reliable business partners. This nuance is of particular importance for Russian issuers that enter the Western market. In addition, high demand for shares usually entails the company’s transition to a qualitatively new level.
- A number of strict conditions and requirements must be met. For example, one of the serious limitations for entering an IPO is the size of the company. Small and medium-sized companies do not enter the Russian stock market due to low demand for their securities. And they are prevented from getting to foreign sites by the capitalization threshold of $ 50 million. And only if the “price” of the company exceeds $ 1 billion, foreign pension, insurance and investment companies are involved in investing;
- Preparing and conducting an IPO takes a lot of time and money. You will have to spend money on the services of the exchange, registrar, financial consultant, underwriter, auditors, lawyers, as well as information support. The amount of fixed expenses can reach $300,000 and above. Strictly speaking, an IPO is the most expensive way to raise funds from the outside.
- Part of the control over the management is lost. After the IPO, the company becomes public. Now its activities are constantly monitored by investors. The community will closely monitor all financial results and indicators. Management will have to regularly disclose information about activities and publish reports. If something goes wrong, the market immediately reacts with a drop in stock prices on the stock exchange. As a result, the capitalization of the company decreases and its image and reputation suffer;
- New shareholders, as a rule, demand quick results. Therefore, managers often have to sacrifice part of long-term projects in favor of short- and medium-term ones. In general, after the IPO, the company has obligations that it can no longer refuse.
What is the purpose of the company when placing shares on the stock market?
Entering the stock and securities market is one of the most promising and profitable investment initiatives. Stocks are one of the most important instruments of the stock market. By purchasing shares, an investor can count on a subsequent increase in profits in the long term. On the other hand, the company, entering the stock market, expects to attract the investments necessary for the development and increase of its profit.
Attracting investments and further development is the most common goal of young companies, but the IPO is also carried out for:
- obtaining an objective assessment of the company, which is necessary for its managerial marketing development (in other words, for the image), and is also important for conducting its purchase / sale transactions;
- increase the liquidity of the company’s share capital;
- increasing the degree of protection of the company from raider attacks and the state not always behaving correctly. In this case, the more small shareholders there are in the company, the more difficult it is to collect a large share package in order to get the right to vote. This, of course, is not a guarantee, but as such, the goal when entering the market also has a place to be;
- increased transparency on the reporting side. If the company has mainly positive financial, economic, production and other indicators, then for it to enter the IPO will be as profitable and productive as possible. In the future, the publication of financial statements especially affects the share price, both in a positive and, accordingly, in a negative direction.
In fact, the process of a company entering an IPO can be called a certain growth for any rapidly developing company, and financial resources are required for development and expansion, but they do not always happen for a large-scale process of reaching a new level, and since achieving the goal of entering the market is a rather laborious, complex process that requires compliance with a number of conditions and, to in addition, time-consuming (it may take several years), business owners often resort to other ways of attracting investment capital, which have both advantages, so are the disadvantages compared to the initial placement of securities on the stock exchange.
External author: Tsaturyan Marat