Vantage Point: Initial Public Offering(IPO)-Types, Process, Advantages and Disadvantages

With the recent advent of big players like Saudi Aramco into the IPO sector followed by the small players especially SBI Cards (Credit Card division of SBI), the knowledge regarding what’s going on the investment sector has become the talk of the town nowadays. In “Vantage Point”, we shall give a layman’s idea of the topic.

An IPO is short for an Initial public offering. As the general description about the process states, a previously unlisted company initially offers shares of stocks to the public which is also known as “Going public”. To have more idea among the general public and non-finance professionals, we can define the IPO process as the first-time parting of the ownership to stockholders or holders by the owners of a privately-owned company on a trading platform referred as the Stock exchange.

So, let’s analyse what are the process, types and different categories of IPO.

The IPO Process

·?????the owners must select a lead investment bank. The bank will sell the shares to as many banks, institutional investors (commercial Bank, insurance companies, mutual funds etc), or individuals as possible. The process of an investment bank handling an IPO is called underwriting.

·?????Due diligence and regulatory filings, which includes identifying, then selling or writing off, unprofitable assets. The team must find areas where the company can improve?cash flow. The SEC will investigate the company. It makes sure all the information submitted is correct and that all relevant financial data has been disclosed.

·?????Pricing- It depends on the value of the company. It is mainly affected by the success or failure of performance and the condition of the market and economy.

·?????The fourth step occurs immediately after the offering(ie,IPO). The underwriter creates a market for the stock after it's issued. It makes sure there are enough buyers to keep the stock price at a reasonable level.?

·?????The final step?is the transition to market competition.?

The IPO Types

·?????Fixed Price Offering: Company determines a fixed price on shares to be offered to investors.

·?????Book Building Offering: company offers a 20% price band(Value-setting method) on shares to investors.

The Advantages

1.??It is a means for fundraising and means of Payment for a growing company-

·?????to finance research and development, reduce debt and acquire new companies

·?????to hire new employees,

·?????to fund capital expenditure,

2.??An IPO is a significant exit opportunity for stakeholders when they feel or are concerned about not seeing any significant financial return on their contributions, whereby they can potentially receive massive amounts of money, or by the least liquidate the capital they currently own in the company. However, it is important to note that liquidation involves procedures and formalities to be dealt with.

3.????As company expands, it will need to have increased exposure and publicity to potential customers who know about and trust its products; this exposure or publicity can be provided by IPO.To complete the IPO process , a company must go through intense scrutiny to ensure what they are reporting about themselves is correct. This scrutiny, combined with many shareholders tendencies to trust companies more can lead to increased credibility for a company and its products.

4.????Before an IPO, companies often have to pay higher interest rates to receive loans from banks or give up ownership to receive funds from investors. An IPO can lessen the difficulty of receiving additional capital significantly. Before a company can even begin its IPO process, it must be audited according to PCAOB3 standards that adds greater confidence on the reporting to be accurate. This assurance will likely result in lower interest rates on loans received from banks, as the company is perceived as being less risky.

The Disadvantages

·???Unlike private companies, public companies are required to file their financial statements with the Securities and Exchange Commission (SEC) every year. These SEC regulations are both burdensome and costly.

·???Founders of Company tend to have a long-term view, with a vision of what their company will look like years from the present and how it will impact the business world. The stock market, on the other hand, has a very short-term profit-driven view. Once a company is public, its every move is scrutinized by investors and third parties around the world, who are generally interested in finding out whether the company will meet its profit target either monthly, quarterly etc

If a company meets its target, its stock price will normally increase; if not, its stock price will normally decrease. Founders who do not accept the idea of the concept of short-term earnings should think carefully about going public.

·???One major disadvantage of an IPO is that founders of the company may lose control of their company. While there are ways to ensure founders retain the majority of the decision-making power in the company once a company is public. Going public means receiving share of money from public shareholders. As such, they expect the company to act in their best interest, even if it means going in a opposite direction the founders view point. If shareholders feel the company is not operating in a way that will help them make money, they will force the company, through shareholder votes or public criticism, to appoint new leadership.

·???Initial public offerings are expensive. Beyond the expenses of regulatory compliance, the IPO transaction process cost includes Underwriting fees,auditors fees and registration and printing fees. The transaction costs will be even higher if a company chooses to hire a financial reporting advisor, or other consultant agents.

**********????Based on a Reading