What is initial public offering (IPO) ?
An initial public offering (IPO) refers to the first time a company publicly sells shares of its stock on the open market. It is also known as “going public.”
Types of IPO:
- Book building: This is the most common mechanism. Investment banks (underwriters) elicit indications of interest from institutional investors, build a book based on these nonbinding orders (effectively a demand schedule), set the price, and use discretion to allocate shares to institutional investors.
- Fixed price offer: The underwriter sets the price and the shares are allocated according to a pre-specified rule.
- Auction: Investors submit limit bids (price and quantity pairs). The price is then set at the market clearing level or below it. If it is set below the clearance price, rationing takes place.
- Hybrid: Some IPOs may involve a combination of the mechanisms above.
Why should I invest in IPO?
➡ Access to capital to fund growth
Public placement of shares on a stock exchange allows the company to attract capital to fund both organic growth (modernisation and upgrade of production facilities, implementation of capital-intensive projects) and acquisitive expansion.
➡ Maximum value of the company
Normally, an IPO is an offer to a large number of institutional and retail investors to become shareholders of the company. The very multitude of large investors and their confidence in the liquidity of their investment in a public entity assure the current owners of a private company about achieving the maximum possible valuation of the business at the time of an IPO or afterwards.
➡ Extra assurances for partners, suppliers and clients
Partners and contractors of a public company feel more confident about its financial state and organisational capabilities as compared to those of a non-transparent private business.
➡ Enhanced loyalty of key personnel
Publicly available information about the share price of a public company allows development of employee motivation schemes based on partial remuneration of staff in the form of participation in the equity capital (for example, share options).
➡ Superior efficiency of the business
Conduct of various due diligences during the IPO process requires a thorough and comprehensive analysis of the company’s business model. During the IPO implementation process, certain internal changes take place, including modification of the organisational structure; selection of the key personnel and delegation of responsibilities; improvement of internal reporting and controls; as well as critical evaluation of the efficiency of the entire business.
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