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IPO

In the late 90s, when euphoria ruled the market, perhaps nothing was more sought after in the stock market than an IPO (Initial Public Offering). You might have wondered how a company transforms itself from a private to a public entity. The list of procedures is long, but the IPO is the point of no return when a private company finally transforms itself into a public one. We already have discussed the methods by which companies can raise capital. In terms of security offerings, issuing bonds (debt) is one way. The issue with bonds is that the company is liable for interest (coupon) payments and eventual repayment of the original debt to the bondholders.How can a company raise cash without the liability of payback? Enter stocks, and the IPO.

When a company decides to go public, it must be ready to open up its financial data such as its balance sheets, assets and liabilities, and profit and loss (P&L) for the world to see and analyze. Its management must also be ready to share the ownership of the company with the rest of the shareholders and take direction from the board of directors. If the management team has presented itself as a capable operator, it may continue to run the company. Regardless, many of the top executives of the company receive large numbers of shares prior to the IPO, which can catapult their wealth into the stratosphere should the IPO be a hit.

What are the steps involved in an IPO? They are many and complicated and there is no need for the average investor to bother with the details. But here is an abbreviated version. Prior to going public, the company retains the services of an investment banker (or a few investment bankers working in conjunction) which acts as the underwriter for the stock issues. An underwriter is charged with guiding the company to have a successful IPO by taking the company through the required steps while helping the company sell the shares. …