A company can raise money by issuing either debt or equity. If the company has never issued equity to the public, but doing it for the first time, it's known as an IPO.
In 1602, the Dutch East India Company was the first company in the world to issue stocks and bonds in an initial public offering
Companies fall into two broad categories: PRIVATE and PUBLIC.
A privately held company has fewer shareholders and its owners don't have to disclose much information about the company. Anybody can go out and incorporate a company: just put in some money, file the right legal documents and follow the reporting rules of your jurisdiction. Most small businesses are privately held. But large companies can be private too. Did you know that IKEA, Domino's Pizza and Hallmark Cards are all privately held? It usually isn't possible to buy shares in a private company. You can approach the owners about investing, but they're not obligated to sell you anything.
Public companies, on the other hand, have sold at least a portion of themselves to the public and trade on a stock exchange. This is why doing an IPO is also referred to as "going public”. Public companies have thousands of shareholders and are subject to strict rules and regulations. They must have a board of directors and they must report financial information every quarter.
From an investor's standpoint, the most exciting thing about a public company is that the stock is traded in the open market, like any other commodity. If you have the cash, you can invest. The CEO could hate your guts, but there's nothing he or she could do to stop you from buying stock.
While some large and successful companies are still privately-owned, many companies aspire toward becoming a publicly-owned company with the intent to gain another source of raising funds for operations. An initial public offering (IPO) represents a private company's first offering of its equity to public investors. This process is generally considered to be very intensive with many regulatory hurdles to jump over. While the formal process to produce the IPO is well documented and as a result is a fairly well-structured process, the transformational process of which a company changes from a private to a public firm is a much more difficult process.
A company goes through a three-part IPO transformation process:
1st.A pre-IPO transformation phase,
2nd.An IPO transaction phase and
3rd.A post-IPO transaction phase.
1st : A Pre-IPO transformation phase
The pre-IPO transformation phase can be considered to be a restructuring phase where a company starts the groundwork toward becoming a publicly-traded company. For example, since the main focus of public companies is to maximize shareholder value, the company should acquire management that has experience in doing so. Furthermore, companies should re-examine their organizational processes and policies and make necessary changes to enhance the company's corporate governance and transparency. Most importantly, the company needs to develop an effective growth and business strategy that can persuade potential investors the company is profitable and can become even more profitable. On average, this phase usually takes around two years to complete.
2nd : An IPO transaction phase
The IPO transaction phase usually takes place right before the shares are sold and involves achieving goals that would enhance the optimal initial valuation of the firm. The key issue with this step is to maximize investor confidence and credibility to ensure that the issue will be successful. For example, companies can choose to have reputable accounting and law firms handle the formal paperwork associated with the filing. The intent of these actions is to prove to potential investors that the company is willing to spend a little extra in order to have the IPO handled promptly and correctly.
3rd : A Post- IPO transaction phase
The post-IPO transaction phase involves the execution of the promises and business strategies the company committed to in the preceding stages. The companies should not strive to meet expectations, but rather, beat their expectations. Companies that frequently beat earnings estimates or guidance are usually financially rewarded for their efforts. This phase is typically a very long phase, because this is the point in time where companies have to go and prove to the market that they are a strong performer that will last.
Reasons for listing:
When a company lists its securities on a public exchange, the money paid by investors for the newly issued shares goes directly to the company (in contrast to a later trade of shares on the exchange, where the money passes between investors). An IPO, therefore, allows a company to tap a wide pool of investors to provide itself with capital for future growth, repayment of debt or working capital. A company selling common shares is never required to repay the capital to investors.
Once a company is listed, it is able to issue additional common shares via a secondary offering, thereby again providing itself with capital for expansion without incurring any debt. This ability to quickly raise large amounts of capital from the market is a key reason many companies seek to go public.
Thus the obvious reason that any company has an IPO is to raise money. There are many reasons to raise money as businesses operate on a larger scale, and they have different needs and plans that require money. Some of more common reasons that a company might need money, or capital, include:
•To buy new equipment or upgrade old equipment
•To expand into a new region or a new kind of business -
•To pay back old debts (and avoid paying the interest on them)
•As an "exit strategy" for the owner or original investors
•To make the original owners and investors rich
Upgrading and Expanding
The first two reasons are fairly obvious. Examples could include a bakery that is losing its share of the marketplace because of the low-carb fad. It could have an IPO to raise capital and buy the equipment it needs to make low-carb products and stay competitive. Or imagine a trucking company that is successful shipping along the west coast of the United States -- if it wants to expand its shipping into the Midwest and southwest, it'll need to buy more trucks, hire more drivers, and lease more warehouse space. An IPO could pay for all of these things.
Using an IPO to repay debts makes a lot of sense if a large portion of the company's initial investment came from a bank loan. Every month, the company's profits are eroded by the interest it has to pay on that loan. There's no interest to pay on the money raised from an IPO; the company can use that money to repay the loan, and that profit-shrinking interest comes right off the balance sheet.
Exit Strategy and Financial Windfall
The last two reasons for having an IPO are closely related. When a company is privately owned, the founders, certain members of the management team (or all the employees, depending on the company) and private investors who helped fund the company, all hold shares in the company. Those shares will have little value since they aren't publicly traded. After the company's IPO, those shares can increase in value by a huge margin. In short, anyone who has a lot of those shares could become very rich by selling them.
So what is an exit strategy? Not everyone who starts a business wants to run it forever.
•Some business owners may just want to get the business going, make it profitable, and then sell their share in the company and move on.
•Some people do it because they enjoy the challenge of starting new companies.
•Some just want to get rich and then retire or repeat the process and get richer still.
Either way, having an IPO can drastically increase the company's value and make it easier to sell a share in the company.
There are benefits to having an IPO other than raising capital.
When a company's stock goes public, it can attract a lot of media attention. This amounts to free advertising for the company. Also, many publishers of stock market information list and track public companies, which means going public can, get a company's name "in the books" and in front of investors and stock brokers
Issuing shares allows employees to hold stock in a company. The employees know that their share of the company will increase in value the more successful the company is. This gives employees more pride in the work they do -- they literally become part owners. This effect can extend to interested business associates, as well. Imagine that the owner of a packaging business buys stock in the bakery we mentioned above when the bakery has its IPO. The packaging business supplies plastic bags to the bakery, so the owner might be willing to give the bakery a deal on the plastic bags in hopes of helping the bakery become more successful (and increasing the value of his stock).
The last benefit to an IPO has to do with rules established by the Securities and Exchange Board of India (SEBI) that strictly regulate public companies to prevent fraud. To go public, a company has to open its accounting practices, sales figures, and marketing plans to anyone who wants to see them. This can make it easier for the company to secure certain kinds of loans and raise money from other investors.
There are several other benefits to being a public company, namely:
•Bolstering and diversifying equity base
•Enabling cheaper access to capital
•Exposure, prestige and public image
•Attracting and retaining better management and employees through liquid equity participation
•Creating multiple financing opportunities: equity, convertible debt, cheaper bank loans, etc.
•Increased liquidity for equity holder
While undertaking an IPO a company is doing two things simultaneously:
â—It is offering shares for sale to the public
â—It is also raising capital
There is no doubt that offering securities to the investment public will help a company’s management and directors retain a large degree of control, as opposed to many other capital funding scenarios.
For example, if a private company decides to use the services of venture capitalists to raise capital, instead of going public, the VC’s (Venture Capitalists) might insist on a decision-making position, such as a seat on the board of directors. When a company decides to raise capital via the going public process of an IPO (Initial Public Offering), those unpleasant considerations are avoided by IPO companies.
No doubt the prestige related with becoming a public company has a definite appeal. The fact that it’s easier for an IPO underwriter to promote a public company is also a pertinent consideration because the funding resources available to public companies are much better than what’s available to private concerns.
Public companies have historically achieved higher recognition than private companies; hence, the public relations image and the perceived stability of being a public company is a plus. All the above considerations should come into play when you are considering the pro’s and con’s of going public via an IPO (Initial Public Offering) and we have the IPO resources to help you make this important step via IPO underwriting
To be continued…..
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