An Initial Public Offering or IPO is the very first offering of a firms’ stock or shares on the stock market, when the firm “goes public” (Business Dictionary.com, 2014). Not all businesses should or need to take this route. In the following paragraphs we will describe an initial public offering for a global firm, along with certain roles, pricing issues, risks, and foreign exchanges. When most businesses start up, they are privately held. This means that the company is only owned by a few people and do not have shares. It is not cheap or easy for a company to become publicly traded. In some cases the benefits of going public outweigh the costs of going public. There are several benefits that come with going public such as, a higher valuation, greater liquidity in public markets, and greater access to capital, attract top talent by enabling the company to grant stock options or restricted stock awards, growth, and grab the attention of other companies.
Also before a company goes public, they must meet basic financial requirements, depending on the exchange the company will be listed in. These exchanges are the New York Stock Exchange (NYSE), NASDAQ Global Select Market, and S&P 500. When a company is getting ready to go public, it must find investment bankers to invest into the business. Investment bankers must have sales and distribution capabilities needed for a successful execution of the IPO, and can provide strong analyst coverage once you go public. The investment bankers that are chosen must fit personality-wise, have good research and analyst coverage, knowledge and understanding of the business and the industry, and whether that bank has brought other companies public in this sector (Wasserman, 2010, How to prepare a Company for an IPO). When a company is getting ready to issue stock, there are risks to the company when offering securities (stock). This is when an underwriter steps in. An underwriter offers to take some of the risk of the offering in exchange for a premium.
They buy the securities from the issuer and then turn around to sell them on the stock market. The issuer gets cash up front instead of waiting to sell stock on their own. The company knows that they are not getting full market value but they no longer have the risk of having to find enough buyers to purchase the stock at a desirable price (Boundless, 2014, underwriters). Underwriters do not mind this deal because they can sell the stock at a higher price and make a profit. The originating house is an investment brokerage firm or several investment bankers joined together to manage the underwriting and sale of a new issue of stock to the general public (US Legal Definitions, 2014, Originating house). A syndicate is a temporary association of investment bankers brought together for the purpose of selling securities; also called a purchase group (allbusiness.com, 2014, Syndicate). One of the investment bankers in this group, usually from the originating house, is selected to manage the syndicate.
There are two types of underwriting syndicates, divided and undivided. In a divided account, the liability of each member investment banker is limited in terms of participation. Once a member sells the securities assigned, that investment banker has no additional liability regardless of whether or not the other members are able to sell their portion of the security or not. In an undivided account, each member is liable for unsold securities up to the amount of its percentage participation irrespective of the number of securities that investment banker has sold. Most syndicates are based on the undivided account arrangement (allbusiness.com, 2014, Syndicate).
When the pricing of the issue or putting a starting price on shares of stock occurs, IPO investors, the issuer’s board of directors and the underwriters will set a price at which the company and any selling stockholders will agree to sell shares to the underwriters at closing. The pricing usually occurs after the close of the markets on the final day of the road show; the stock will begin trading on the exchange on a “when issued” basis the next morning (Wasserman, 2010, inc.com). The company that issues the shares controls the IPO process along with the underwriters. The SEC does not regulate business IPO share and how many they use or how shareholders they have.
There are only a limited numbers of broker-dealers most of the underwriters hit investors of wealth because they can buy lager blocks of IPO’s shares and can hold the investors for long team. Some ricks in public offering losing the company to investors and the public. Going public you must share all information such as financial reporting and how the company is ran. By going public the company gives up all information to the SEC, the shareholders and, public. A discussion of any foreign exchange risks the company can face with your ideas about how to mitigate them…
One risk would be for the investors how because when exporting or importing the product the changes in currency exchange rate and the investor may lose money on the investment or could gain on the investment also, to do converted back into the current currency. Also the company could lose lots of money in other countries but, the risk may out way the bad for investors and the company. Investors like taking risk and if they believe it will out way the bad then they will take the risk to mitigate the company. In conclusion, not all companies can afford or meet all of the special requirements to become an IPO. Sometimes it is not necessary for companies to become IPOs. If you are a company considering going public, check into all the options and all of the requirements needed for the market in which you will be listed. The choice is up to you and all others involved in the decision.
All Business. (2014). Syndicate Definition. Retrieved from http://www.allbusiness.com/glossaries/syndicate/4944704-1.html Boundless Finance. (2014). Boundless “Underwriting”. Retrieved from http://www.boundless.com/finance/textbooks/ Business Dictionary. (2014). IPO Definition. Retrieved from http://www.businessdictionary.com Titman, S., Keown, A. J., & Martin, J. D. (2014). Financial Management: Principles and applications (12th ed.). Upper Saddle River, NJ: Pearson/Prentice. U.S. Legal Definitions. (2014). Originating House definition. Retrieved from http://www.definitions.uslegal.com/0/originating-house-underwriting/ Wasserman, E. (2010). How to Prepare a Company for an Initial Public Offering. Retrieved from http://www.inc.com/guides/preparing-for-initial-public-offering.html