June 24, 2014 at 12:57What is an IPO and why is it needed
On the network you can often find stories about how companies entered the stock exchange and conducted an IPO, as a result of which the founders of the business became billionaires. However, not everyone knows how much work is behind this process of transferring a company from private to public. Today we will look at this process step by step.
What is an IPO?
When a company wants to offer its shares to the general public, it conducts an IPO (Initial Public Offering - IPO). Accordingly, the organization’s status changes - instead of private (anyone can’t become a shareholder), it becomes public (anyone can become a shareholder).
Private companies may have shareholders, but there are not many, and such companies are faced with regulatory requirements that are different from those presented to public. The process of preparing the initial public offering of IPOs) takes from several months to a year and costs the company quite substantial funds.
Read more about organizing an IPO on the Moscow Exchange here .
Why do companies conduct IPOs
It's all about the money - the company wants to raise funds. Once received, this money can be used for business development or, for example, reinvestment in infrastructure.
Another plus is the presence of publicly traded shares of the company - the ability to offer top managers options, luring the best specialists. In addition, shares can be used in mergers and acquisitions, covering part of the payment - when buying WhatsApp Facebook, the founders of the messenger received a significant portion of $ 19 billion in shares of a social network that has already been listed. Listing with the world's largest exchanges - the NYSE or NASDAQ - is simply prestigious.
First steps in preparing for an IPO
A company that has gathered on the exchange hires an investment bank (or several banks) that will be involved in the process of organizing an IPO. Theoretically, it is possible to organize trading in your shares on your own, but in practice no one does this. Banks involved in organizing IPOs are called underwriters.
After a bank is hired - for example, Goldman Sachs or Morgan Stanley - negotiations are held between their representatives and company management, during which the price of the shares offered for purchase, their type, and the total amount of funds to be raised are determined.
After an agreement is signed between the company and the underwriter, the latter submits an investment memorandum to the regulatory body of a particular country. In the USA, it is the Securities Commission (SEC), and in Russia it is the Bank of Russia. This document contains detailed information about the proposal and the company - financial statements, management biographies, lists the existing legal problems of the organization, the purpose of raising funds and discloses the list of current shareholders of the company. Then the regulatory body checks the information provided, and, if necessary, requests additional data. If all the information is correct, an IPO date is assigned, and the underwriter prepares all the financial data of the company.
What is the interest of underwriters
Investment banks invest in IPOs and “buy” shares in the company before they are finally listed on the exchange. Banks earn on the difference between the share price that they paid before the IPO and the price that is set at the start of trading. When a promising company goes for an IPO, the competition of banks for the right to become an underwriter of its IPO can be very serious.
To attract interest in IPOs, underwriters often conduct an advertising campaign (Road Show), during which they present previously collected information about the company's financial performance to prospective investors, sometimes even in different parts of the world. Usually the Road Show is arranged for large investors. Often such investors are offered to buy shares before the start of official trading - this process is called allocation.
Stock price, stock exchange
As the IPO date draws near, the underwriter and the publicly traded company agree on a stock price. The figure may depend on many factors: the prospects of the company itself, the results of the Road Show and the current market situation.
Similarly with underwriters, exchanges compete for the placement of large and promising companies, for which the appearance of such a company in the listing means an increase in overall liquidity and trading volumes. Also plays its role and prestige. In the case of such a popular company, representatives of exchanges speak to its management, explaining the advantages of placing shares on their site.
IPO stock purchase
Private investors can’t buy shares in the company before the official start of trading. Often, in the first days of trading, the shares of new companies are subject to strong fluctuations, so analysts usually advise not to rush into transactions, but to wait until the price is at a more or less stable level.
Why Russian companies conduct IPOs abroad
Recently, Russian companies began to show some activity on the Moscow Exchange (Yandex held an additional placement of shares, and Dozhd, Bolshoi Gorod and Slon.ru plan to merge into a holding and carry out an IPO). However, most of the exchange activity of Russian companies takes place abroad.
Here is what the chief economist of ITinvest Sergey Egishyants thinks about this :
Everything is obvious: capital in the West - that's why companies from all over the world, including Russian ones, place their securities there. Recently, IPOs are gaining popularity in China - because the local capital market has also expanded to a fair extent, so many seek to attract Chinese money.
Western and Eastern investors are in no hurry to Russian sites - for many reasons (protection of property rights is not enthusiastic, market capacity is orders of magnitude smaller, etc.). Theoretically, of course, there are a lot of capital in Russia, but it’s only if you look formally: it’s clear that most of the free (!) Assets owned by large businessmen and some politicians are not placed in accounts with Sberbank, but in western offshore funds and banks. In such conditions, the behavior of Russian firms seeking accommodation in the West is quite natural.
IPO of Russian companies in 2005-2013 Data Source: PWC
Pros and cons of IPO
The fact of an IPO for a company is usually positive, because it means that it has grown enough to qualify for raising capital in this way - they resort to it only when you really need a lot of money for large-scale expansion. In addition, public companies attract much more attention, which makes it easier for them to recruit staff and the marketing process.
Among the shortcomings of the IPO can be noted the increasing attention to the company from the regulatory authorities after the listing - there are a large number of requirements of both the state and the exchange platforms themselves, which companies trading on them must comply with. In particular, this concerns the issue of financial statements. In addition, the founders of the company are not always able to immediately sell their shares and become millionaires after an IPO, as this can reduce their rate and capitalization of the business.
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