From this article you will learn:
- Essence of IPO
- Why do you need an IPO?
- IPO stages
- Why do companies love IPOs?
- Disadvantages of an IPO
- Famous IPOs in history
- ICO and IPO: what is the difference?
What is an IPO - definition of the term
IPO is an abbreviation of the English term Initial Public Offering, which literally stands for “Initial Public Offering”. During an IPO (read as ai-pi-o), the issuer offers its shares for purchase to everyone - i.e. unlimited number of persons. In simple terms, an IPO is the sale of shares on the stock exchange for the first time. Then the shares are traded on the secondary market - on the stock section of the international exchange.
Of course, no one comes out of the woodwork for an IPO - this process is preceded by long preparation + a marketing campaign to create a stir and attract more buyers. Plus, several so-called anchor investors are usually attracted, who purchase the majority of the shares being placed. Typically these are investment funds, commercial banks, large private investors, etc.
Going public is a completely different level for a company. It becomes public – i.e. its owners can be literally any person. The company publishes its reports in the open and must share profits with its owners - that is, shareholders. Profits are shared in the form of dividends.
Why do companies love IPOs?
The advantages of raising capital through an IPO include:
- the company receives free money that can be used to pay off debts to other creditors (this will improve financial performance), improve production or purchase new developments;
- the company acquires a specific market value, i.e. its assessment is carried out according to completely different parameters;
- raised money improves financial performance - the size of equity and additional capital increases;
- the shares themselves can be used to obtain financing if they are used as collateral;
- using a block of shares you can pay off creditors;
- using stock options, you can pay top managers, while motivating them to work more efficiently (since the cost of exercising the option will depend on the company’s income);
- a raider takeover of the company is excluded, since the controlling stake is held by the owners.
In simple words, a company's IPO is useful - both for prestige and for work. The company is actually moving to a qualitatively different level. If you put your shares on foreign markets, then the company can safely be called international.
IPO Objectives
Why do IPOs happen at all and why is it profitable for a company to share profits with shareholders? (Well, here’s a small disclaimer: in fact, not all companies pay dividends - Google, for example, has never paid anything. But the purpose of buying shares is not only to receive dividends, but also to earn money from an increase in the price of the security. )
The main goal of an IPO is to attract capital, which can be used further for personal enrichment, business development and investment.
Often, with the help of an IPO, the authorized capital of a company is increased or the bank is recapitalized (as Tinkoff did with the help of an SPO - secondary public offering).
Other tasks:
- gaining access to cheaper borrowing - public companies receive loans on more favorable terms and enjoy greater confidence from investors when issuing bonds (hence, a lower coupon can be assigned to bonds);
- attracting qualified employees (including through stock options or distribution of shares);
- increasing the liquidity of shares - the larger the issue, the more shares are in circulation; with a small free-float, problems arise;
- increasing the prestige of the company and brand (where would we be without this!);
- establishing relationships with new partners, suppliers and distributors (it is more pleasant and interesting to work with a public company);
- protection against raider takeover of a company - the more shares in circulation and the more minority shareholders, the more difficult it is to collect a sufficient number of votes.
In addition, an increase in the number of assets allows the company to develop more intensively and make acquisitions. Some managers, after bringing a company to IPO and receiving a large block of shares, sell it at the peak of its value and get rich. Well, not only managers, but also investors, of course
