Initial Public Offering
An Initial Public Offering (IPO) is a type of public offering where shares of a company are sold to the general public, on a stock exchange, for the first time. Through this process, a private company transforms into a public company.
Raising capital through an IPO
IPOs are used by companies to raise new (expansion) capital - in this case new shares are issued - or as an exit for owners or early private investors, who sell their shares to the public.
Consequently, in the first case a company actually raises money, in the second case no money flows to the company as a result of the IPO process, it flows to the former owners.
In so-called secondary offerings, a company that is already listed can either issue new shares or sell additional shares of existing owners. An advantage of being a publicly traded enterprise is that acquisitions may be paid in shares. The increased name recognition that comes with a listing and becoming more attractive for employees are also mentioned as advantages.
Organising the IPO
Most companies undertaking an IPO do so with the assistance of external lawyers and an investment banking firm. Preparation includes an underwriting process by a syndicate made up of a group of investment banks.
The bank will help value the shares (share price), prepare a prospectus containing detailed information about the proposed offering and establishing a public market for the shares (initial sale). Although an IPO offers many advantages, at the same time, a listing carries a number of costs including the obligation to produce and disclose financial statements, adopt corporate governance codes and pay dividends.
Finally, there is a possibility of a change-of-control.