Today, when you hear that a company is going IPO, they actually mean that as a private company, they are making an initial public offering on the stock exchange. They go from being a privately owned company to public ownership.
It is not easy to be listed on a major stock exchange. To qualify, companies have to have strong fundamentals and proven profitability to qualify for an IPO, it carries a considerable amount of prestige.
Now, it is not to be taken lightly. It is a big process with many pros and cons but it does open many financial doors.
Here are some of the pros and cons of an IPO:
- The company gets exposure, prestige and increased awareness of public image which helps to increase their sales and profits.
- The company gives a lower cost of capital.
- Facilitates potential for return for shares of stock acquisitions as they can issue more stock in a secondary offering making mergers and acquisitions easier to arrange with stock issued as part of the deal.
- Has a diverse group of investors to raise capital.
- Attracts higher caliber management and skilled employees through liquid equity participation and other benefits like employee stock ownership plans.
- Compared to other options, the company can raise large amounts of money.
- Attracts ready buyers and sellers on the stock market.
- Due to new shareholders who get voting rights, they suffer losing control which can affect the company decisions.
- The company is obligated to disclose business information, financial, accounting and tax.
- Disclose information publicly that can be useful to their competitors.
- Ongoing and significant legal, accounting and marketing costs.
- More time required due to management for reporting.
- In the event that they do not raise the required funding that the market does not accept the IPO price, they risk suffering the stock price going lower after the offering.
Once a company decides that it wants to go public, they have to hire an investment bank to underwrite the IPO which involves raising money either by debt or equity. They negotiate the amount of money the company will raise and the type of securities that they will issue.
At the conclusion of the negotiation and after a deal has been agreed, then they need to file an initial draft offer document to the Australian Securities and Exchange Commission (ASIC) or the Securities and Exchange Commission (SEC) in the U.S.A.
Public companies are overseen by similar governing bodies in other countries. In this document is all the relevant information for potential investors.
Allocation of shares
An allocation of shares is then offered to investors, customers and the general public which can be bought via your stockbroker. Then, the allocation of shares is granted after the applications are received.
The final step – listing
The shares are listed on the stock market. This is when you can trade the company’s shares which can increase or decrease depending on the markets.
Some of the largest IPO’s so far are:
- Facebook which raised $16.01 billion in 2012
- Visa raised $19.7 billion in 2008
- AIG -American Insurance Group raised $20.5 billion in 2006
- General Motors (GM) raised $18.15 billion in 2010
- Alibaba Group raised $25 billion in 2014
IPO season in full gear
The good news for traders and investors is that both of these listed companies can be traded on Plus500’s platform.
In the coming months, there are a number of listed companies who are expected to IPO. Here’s the list with the valuation:
- SpaceX with $12 billion
- Airbnb with $31 billion
- Dropbox with $10 billion
- Pinterest with $11 billion
- BuzzFeed with $1.7 billion
- In Europe, Spotify with $8.5 billion
- Uber, is expected to make its debut on the NYSE in April 2019. (Plus500 traders will be able to Buy and Sell Uber shares shortly afterwards). Since they launched they have received funding worth $7.4 billion and are now worth $51 billion.
- Pinterest is also set to list its shares in the upcoming month
Here’s what happened after Snap Inc., the tech giant, went public on the NYSE on 2 March. On the first day of trading, they were valued at $28 billion. Their share price rocketed from $17 to a closing price of $24.48 in its first day of trading!
It is interesting to note that there are a number of large companies that are still private like IKEA, Hallmark Cards, Publix Supermarkets and Mars Candy.