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Initial public offering(ipo)

  2. 2. Initial Public Offering A type of public offering where shares of stock in a company are sold to the general public, on a securities exchange OR The first sale of stock (shares) by a private company to the public.
  3. 3. Reasons for IPO  used by companies to raise expansion capital  to possibly monetize/liquidate the investments of early private investors  to become publicly traded enterprises  enhance corporate image, thus providing visibility  creating multiple financing opportunities: equity, convertible debt, cheaper bank loans
  4. 4. Process for IPO  First thing – hire an investment bank which acts as underwriter  The company and the bank then meet to negotiate the deal  Discuss how much amount of money a company will raise, the type of securities[preferred or common] to be issued
  5. 5. 1. Select an underwriter  An underwriter is an investment firm that acts as an intermediary between a company selling securities and the investing public  The underwriter is the principal player in the IPO  Typically, the underwriter buys the securities for less than the offering price and accepts the risk of not being able to sell them
  6. 6. 2. Negotiating the deal  Register with SEC [Securities and Exchange Commission]  Red Herring – Print prospectus describing details of issuing corporation and proposed offering  Road-Show – presented to institutional/potential investors allowing firms to raise interest and thus the price of shares
  7. 7. 3. Pricing and Selling  The securities are priced based on the value of the company and expected demand for the securities  Examples of valuation methods:  NetPresent Value  Earnings/Price ratios  A full-fledged selling effort gets under way on the effective date of the registration statement  A final prospectus must accompany the delivery of securities
  8. 8. Is it a good time to do an IPO?  Determinants of suitability:  The degree of urgency for financing your company  The general stock market condition  The industry market condition  The frequency and size of all IPO’s in the financial cycle
  9. 9. Financing New Ideas  Personal savings  Bank  Government  Large industrial companies  Venture Capital Funds  Mostly organized as private partnerships  Need to prepare a business plan for funding  They invest in stages to control risk  They require board representation and get shares
  10. 10. IPO activity based on Demand/Supply  Demand-side explanation: start-up firms with good projects cannot get private funding and they use IPO for raising capital  Ifa hot issue period* is driven by demand-side for funds then it may be advantageous for a new firm to go public * hot issue period - A time period with a lot of IPOs
  11. 11. IPO activity based on Demand/Supply  Supply-side explanation: during some time periods, investors and institutions that invest in IPOs have excess funds to invest  Ifa hot issue period is driven by supply-side then a new firm may be better off delaying to go public - competition for funds
  12. 12. Factors to keep in mind before applying in an IPO  Investors need to carefully go through the Red Herring(preliminary prospectus) and the final prospectus filed with the ROC  Objects of the issues and its risk factors  Company’s & its Promoters track record in running a business  Issue Price  Capital structure of the company  Tax benefits  Any published reports that forecast the future earnings
  13. 13. Disadvantages of the IPO  Expensive A typical firm may spend about 15-25% of the money raised on direct expenses[legal/marketing/accounting]  Reporting responsibilities  Public companies must continuously file reports with the SEC and the stock exchange they list on  Loss of control  Ownership is transferred to outsiders who can take control and even fire the entrepreneur cont..
  14. 14. Disadvantages..  Requirement to disclose financial and business information  Meaningful time, effort and attention required of senior management  Public dissemination of information which may be useful to competitors, suppliers and customers  Risk that required funding will not be raised  Market forces the company to sacrifice long term gains for short term profits
  15. 15. Alternatives to IPO  Strategic partnerships  Qualified Institutional Placement (QIP)  Private Placement of Stock and Bonds  Reverse Mergers  Private Equity
  16. 16. IPO Failures  - One of the first big social media websites. In 1998, at the peak of the Internet boom floated the idea of going public, a decision that paid off handsomely -- at first. - The IPO stock was offered at $9 a share and skyrocketed to $65 by the end of the trading day, marking the largest single-day gain to date -- an incredible 606% - When the bottom fell out of the online advertising market in 2000, citing reports of a sagging online advertising market and a cooling of investor interest, it looked for an alternative business model. - In 2001, it had cut half its workforce and sold its major Web properties. - Current share price 25 cents.
  17. 17. IPO Failures  Shanda Games - one of the most popular online gaming market, following in the footsteps of other Chinese companies, planned a big coming out party with a U.S. IPO in September 2009. - hired heavy hitting underwriters JP Morgan and Goldman Sachs to set the IPO price and determine the number of shares to offer. - the underwriters bumped up the total number of shared from 63 million to 83.5 million, set the opening share price at $12.50, the very highest end of the pricing spectrum, raising a total of $1.04 billion. - by pushing the price to the limit, they sucked up all of the investors willing to pay top dollar, the stock took a huge and immediate loss of 14 percent, finishing the next day down $1.75
  18. 18. THANK YOU - Govind Ghiraiya