Initial Public Offerings Paper Essay
Initial Public Offerings Paper
When an organization goes global many outside factors can help the organization as well as work against it. There are many risks that are involved when dealing with foreign exchanges and an organization must understand how to deal with those risks and issues that may arise. Making public offerings presents risks as well and this is where those closest to the organization help protect and maintain the organizations image. The following paper will cover and address the issues and risks involved with an organization becoming a global firm as well as ways to mitigate any issues that may present themselves during the duration of the company’s transition.
Role of Investment Banker and Underwriter
One of the primary ways to raise capital for a company is the sale of stocks and bonds. Special expertise is required when executing these transactions, which is done in a way that will exploit income to directing regulatory necessities when assessing implements. At this point is when an investment bank typically comes into play. Large enterprises and the investors are the investments banks bridges. Their primary goals are to instruct organizations and governments on how to see their business challenges are and how to support them. The role of underwriters typically obtains underwriting fees from their issuing clients. Underwriters also gain revenues by marketing underwritten dividends to venture capitalists. Underwriters may take responsibility for issuing a safety issue to the community.
Role of Originating House and Syndicate
When a company is preparing for an initial public offering, it must go through an originating house or a syndicate. The originating house is an investment or brokerage firm that manages the underwriting and sale of a new issue of stock to the general public. When the negotiation of an underwriting involves more than one firm, a syndicate is formed to handle the process. A syndicate is created when several brokerage firms come together to complete the underwriting process and manage the sale of the new securities. Both the originating house and a syndicate will first buy the new securities and then resell them to the public. These two entities play a crucial role in an initial public offering.
Explanation of Pricing Issue
Issuing securities is a positive way to gain capital for an organization. The first issuance of a security is priced carefully to maximize the amount of capital an organization will receive as well as entice investors to purchase the securities. New securities issued are typically sold through a brokerage firm connecting the organization with investors. If the issue is priced too high, the firm cannot sell the issues tying up their capital. If the issues are priced too low investors will purchase them very quickly causing the price to jump; this is good for the investors but bad for the original organization (Mayo, 2012).
Risks Involved in an Initial Public Offering
There are risks associated with any expansion a company may go through. An initial public offering can be a risk because there is no guarantee of what this stock will do on the first day. The stock may sell quickly, or the stock may not sell at all. Many people are not comfortable with initial public offerings because there is no historical data on the company, and this makes their decision on purchasing the stock difficult. Those investing in the company want to be sure they will receive a return on their investment and without proper documentation to back this up they may not be willing to make those initial purchases. The private investors in the firm will also lose some control of the organization because now outsiders gain voting control over the firm. The risk of this decision is the other company may resist the takeover. This means there is a risk of a costly takeover battle. .
Foreign Exchange Risks
When an organization decides that it wants to reach out into the global market, there are some risks that should be analyzed before moving on. An organization is at risk when it comes to foreign exchange due to the different currency that is involved with each country that the company expands to. “Foreign exchange risk occurs when the value of the investment fluctuates due to changes in a currency’s exchange rate.” (Sargeant, 2015). When the currency in the domestic market appreciates against the currency in a foreign market, the profits earned in that foreign market or country will be lower because it has been changed back to the currency in the domestic market where the organization is based. In this type of situation, the organization will face times in which revenues will go up as well as come down. Even though the revenues from expanding into a global market may fluctuate, there are still advantages that an organization can use to the companies advantage.
An initial public offering can be a difficult and complicated process for a company. There are many roles and players involved in the process such as the investment banker, underwriter, originating house, and syndicate. Also, there may be many risks involved for both the company and the players. It may take time to make money off the stock, and there could be an initial debt for both the company and those involved. Currency exchange rates can affect the stock causing a fluctuation in price. The process of an initial public offering can be a difficult and complicated process, but the benefits are significant and may outweigh the costs and risks of the process.
Mayo, H.B. (2012). Basic finance. An introduction to financial institutions, investments, and management (10th ed.). Retrieved from The University of Phoenix eBook Collection database.
Sargeant, Nicola (2015) “What Risks Do Organizations Face When Engaging In International Finance Activities?