You are on page 1of 14

THE INITIAL PUBLIC OFFERING (IPO)

Initial Public Offering (IPO)

Definition: A companys first equity issue made available to the public. This issue occurs when a privately held company decides to go public Also called an unseasoned new issue.

Why do companies go public?

New capital

Almost all companies go public primarily because they need money to expand the business
Once public, firms have greater and easier access to capital in the future Its easier for other companies to notice and evaluate a public firm for potential synergies IPOs are often used to finance acquisitions

Future capital

Mergers and acquisitions

Disadvantages of the IPO

Expensive
A

typical firm may spend about 15-25% of the money raised on direct expenses companies must continuously file reports with the SEC and the stock exchange they list on
is transferred to outsiders who can take control and even fire the entrepreneur

Reporting responsibilities
Public

Loss of control
Ownership

Outline of the IPO process:


1.

2.
3. 4. 5. 6.

Select an underwriter Register IPO with the SEBI Print prospectus Red Herring Price the securities Sell the securities

1. Select an underwriter

An underwriter is an investment firm that acts as an intermediary between a company selling securities and the investing public The underwriter is the principal player in the IPO Typically, the underwriter buys the securities for less than the offering price and accepts the risk of not being able to sell them

Types of underwriting

Firm commitment underwriting:


The

underwriter buys the entire issue, assuming full financial responsibility for any unsold shares Most prevalent type of underwriting in the U. S.

Best efforts underwriting:


The

underwriter sells as much of the issue as possible, but can return any unsold shares to the issuer without financial responsibility

Leading IPO Underwriters


1.

2.
3.

Goldman Sachs Morgan Stanley Merrill Lynch

2. Register IPO with SEBI

The firm must prepare a registration statement and file it with the SEBI The registration statement discloses all material information concerning the corporation making a public offering

3. Print prospectus

The prospectus is a legal document describing details of the issuing corporation and the proposed offering to potential investors Contains much of the information in the registration statement The preliminary prospectus is sometimes called a red herring

4.Red Herring

The underwriter puts together what is known as the Red Herring. This is an initial prospectus containing all the information about the company except for the offer price and the effective date, which aren't known at that time. With the red herring in hand, the underwriter and company attempt to hype and build up interest for the issue. They go on a road show-also known as the dog and pony show-where big institutional investors are courted.

5. Price the securities

How much to charge for giving away a part of the firm is very important to the issuers The securities are priced based on the value of the company and expected demand for the securities Examples of valuation methods:
Net

Present Value Earnings/Price ratios

6. Sell the securities

A full-fledged selling effort gets under way on the effective date of the registration statement A final prospectus must accompany the delivery of securities

Average IPO returns from 2009 to 2011

Key India IPO statistics 2009 2010 2011 Bombay and National stock exchanges 20 63 (215%2) 39 (38%3) (number of deals) Bombay and National stock exchanges $4.1b $8.3b (102%2) $1.2b (86%3) (capital raised (US$)) Average deal size (US$) $203.4m $132.5m $30.7m Top two sectors Energy (5) Industrials (17) Materials (9) (number of deals) M&E (3) Materials (11) Financials (6) Top two sectors Energy ($3.4b) Materials ($3.9b) Financials($609.2m) (capital raised) M&E($0.2b) Industrials ($1.7b) Materials ($133.5m) Most IPOs by Indian issuers are duallisted on Bombay and National stock exchanges. Percentage change from 2009 to 2010. Percentage change from 2010 to 2011.

You might also like