Hello and welcome to the next in my ‘what is’ series, this time we are looking at what is an IPO.
Previous topics cover in the series can be found here
An IPO or Initial Public Offering is a type of public offering where shares in a company are sold to investors. An IPO is underwritten by investment banks. It is these banks that arrange for the companies shares to be listed on a stock exchange. When a company creates shares it is usually known as floating or going public. The company then changes from a being private company to a being a public company.
Process of going public
The first step of going public to to hire an investment bank or underwriter. It is these underwriters that arrange the sale of the company shares to the public. If the IPO is large enough multiple underwriters may be needed to spread the workload. The underwriters take a potion of the share sales as a fee, this is called the underwriting spread.
The company wanting to go public also appoints a manger called a bookrunner to help determine the price the company shares should be issued at. There are two main ways the share price is determined. The first way is where the company with help from the bookrunner fixes a price(“Fixed Price Method”). The other way is through analysis of investor demand demand created by the bookrunner (“Book Building”).
Pros of an IPO
- Allows the company cheeper access to capital.
- Possibility of attracting better employees through share options.
- Helps with acquisitions, through buying with stock swaps.
- Increases the public image of the company.
Cons of an IPO
- Going public creates significant legal, marketing and account costs.
- There is a requirement to make company finances public.
- Possible loss of control of company
I thought it would be interesting to list some of the largest IPO’s that there has been. Here are five of the biggest.
- The Alibaba Group, 2014, $25 billion
- Agricultural Bank of China, 2010, $22.1 billion
- Industrial and Commercial Bank of China, 2006, $21.9 billion
- American International Assurance, 2010, $20.5 billion
- Visa Inc., 2008, $19.7 billion