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Encyclopedia > Initial public offering

Initial public offering (IPO), also referred to simply as a "public offering," is the first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded. Image File history File links Broom_icon. ... IPO can refer to: In finance, Initial public offering In intellectual property (patents, trademarks, copyrights): the Intellectual Property Owners Association an organization and public office referred to as intellectual property office In medicine, the Instituto Português de Oncologia (Portuguese Oncology Institute), located in Lisbon, Porto and Coimbra In transport...


In an IPO, the issuer may obtain the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), best offering price and time to bring it to market.


IPOs can be a risky investment. For the individual investor, it is tough to predict what the stock will do on its initial day of trading and in the near future since there is often little historical data with which to analyze the company. Also, most IPOs are of companies going through a transitory growth period, and they are therefore subject to additional uncertainty regarding their future value.

Contents

Reasons for listing

When a company lists its shares on a public exchange, it will almost invariably look to issue additional new shares in order to raise extra capital at the same time. The money paid by investors for the newly-issued shares goes directly to the company (in contrast to a later trade of shares on the exchange, where the money passes between investors). An IPO, therefore, allows a company to tap a wide pool of stock market investors to provide it with large volumes of capital for future growth. The company is never required to repay the capital, but instead the new shareholders have a right to future profits distributed by the compa



The existing shareholders will see their shareholdings diluted as a proportion of the company's shares. However, they hope that the capital investment will make their shareholdings more valuable in absolute terms.


In addition, once a company is listed, it will be able to issue further shares via a rights issue, thereby again providing itself with capital for expansion without incurring any debt. This regular ability to raise large amounts of capital from the general market, rather than having to seek and negotiate with individual investors, is a key incentive for many companies seeking to list In equities, a rights issue can be made when a company wants to issue new shares. ...


Procedure

Sam Martins IPOs generally involve one or more investment banks as "underwriters." The company offering its shares, called the "issuer," enters a contract with a lead underwriter to sell its shares to the public. The underwriter then approaches investors with offers to sell these shares. To meet Wikipedias quality standards, this article or section may require cleanup. ... In banking, underwriting is the detailed credit analysis preceding the granting of a loan, based on credit information furnished by the borrower, such as employment history, salary, and financial statements; publicly available information, such as the borrowers credit history, which is detailed in a credit report; and the lender...


The sale (that is, the allocation and pricing) of shares in an IPO may take several forms. Common methods include:

A large IPO is usually underwritten by a "syndicate" of investment banks led by one or more major investment banks (lead underwriter). Upon selling the shares, the underwriters keep a commission based on a percentage of the value of the shares sold. Usually, the lead underwriters, i.e. the underwriters selling the largest proportions of the IPO, take the highest commissions—up to 8% in some cases. Dutch auction is a type of auction where the auctioneer begins with a high asking price which is lowered until some participant is willing to accept the auctioneers price, or a predetermined reserve price (the sellers minimum acceptable price) is reached. ... A bought deal occurs when an investment bank purchases securities from an issuer before selling them to the public. ... This article is about the association term. ... The payment of commission as remuneration for services rendered or products sold is a common way to reward sales people. ...


Multinational IPOs may have as many as three syndicates to deal with differing legal requirements in both the issuer's domestic market and other regions. For example, an issuer based in the E.U. may be represented by the main selling syndicate in its domestic market, Europe, in addition to separate syndicates or selling groups for US/Canada and for Asia. Usually, the lead underwriter in the main selling group is also the lead bank in the other selling groups.


Because of the wide array of legal requirements, IPOs typically involve one or more law firms with major practices in securities law, such as the Magic Circle firms of London and the white shoe firms of New York City. A law firm is a business entity formed by one or more lawyers to engage in the practice of law. ... This article or section does not cite any references or sources. ... This article is about the capital of England and the United Kingdom. ... White shoe firm is a phrase used to describe the leading professional services firms in America, particularly firms that have been in existence for more than a century and represent Fortune 500 companies. ... New York, New York and NYC redirect here. ...


Usually, the offering will include the issuance of new shares, intended to raise new capital, as well the secondary sale of existing shares. However, certain regulatory restrictions and restrictions imposed by the lead underwriter are often placed on the sale of existing shares.


Public offerings are primarily sold to institutional investors, but some shares are also allocated to the underwriters' retail investors. A broker selling shares of a public offering to his clients is paid through a sales credit instead of a commission. The client pays no commission to purchase the shares of a public offering, the purchase price simply includes the built-in sales credit.


The issuer usually allows the underwriters an option to increase the size of the offering by up to 15% under certain circumstance known as the greenshoe or overallotment option. A greenshoe, also known by its legal title as an over-allotment option (the only way it can be referred to in a prospectus), gives underwriters the right to sell additional shares in a registered securities offering if demand for the securities is in excess of the original amount offered. ...


Business cycle

In the United States, during the dot-com bubble of the late 1990s, many venture capital driven companies were started, and seeking to cash in on the bull market, quickly offered IPOs. Usually, stock price spiraled upwards as soon as a company went public. Investors sought to get in at the ground-level of the next potential Microsoft and Netscape. Image File history File links Gnome-globe. ... The dot-com bubble was a speculative bubble covering roughly 1995–2001 during which stock markets in Western nations saw their value increase rapidly from growth in the new Internet sector and related fields. ... Venture capital is a general term to describe financing for startup and early stage businesses as well as businesses in turn around situations. ... A bull market is a prolonged period of time when prices are rising in a financial market faster than their historical average. ... Microsoft Corporation, (NASDAQ: MSFT, HKSE: 4338) is a multinational computer technology corporation with global annual revenue of US$44. ... For the web browser produced by this corporation, see Netscape (web browser). ...


Initial founders could often become overnight millionaires, and due to generous stock options, employees could make a great deal of money as well. The majority of IPOs could be found on the Nasdaq stock exchange, which lists companies related to computer and information technology. However, in spite of the large amounts of financial resources made available to relatively young and untested firms (often in multiple rounds of financing), the vast majority of them rapidly entered cash crisis. Crisis was particularly likely in the case of firms where the founding team liquidated a substantial portion of their stake in the firm at or soon after the IPO (Mudambi and Treichel, 2005). Millionairess redirects here. ... Main article: Option A stock option is a specific type of option that uses the stock itself as an underlying instrument to determine the options pay-off (and therefore its value). ... NASDAQ in Times Square, New York City. ...


This phenomenon was not limited to the United States. In Japan, for example, a similar situation occurred. Some companies were operated in a similar way in that their only goal was to have an IPO. Some stock exchanges were set up for those companies, such as Nasdaq Japan.


Perhaps the clearest bubbles in the history of hot IPO markets were in 1929, when closed-end fund IPOs sold at enormous premiums to net asset value, and in 1989, when closed-end country fund IPOs sold at enormous premiums to net asset value. What makes these bubbles so clear is the ability to compare market prices for shares in the closed-end funds to the value of the shares in the funds' portfolios. When market prices are multiples of the underlying value, bubbles are occurring.


Auction

A venture capitalist named Bill Hambrecht has attempted to devise a method that can reduce the inefficient process. He devised a way to issue shares through a Dutch auction as an attempt to minimize the extreme underpricing that underwriters were nurturing. Underwriters, however, have not taken to this strategy very well. Though not the first company to use Dutch auction, Google is one established company that went public through the use of auction. Google's share price rose 17% in its first day of trading despite the auction method. Perception of IPOs can be controversial. For those who view a successful IPO to be one that raises as much money as possible, the IPO was a total failure. For those who view a successful IPO from the kind of investors that eventually gained from the underpricing, the IPO was a complete success. It's important to note that different sets of investors bid in auctions versus the open market—more institutions bid, fewer private individuals bid. Google may be a special case, however, as many individual investors bought the stock based on long-term valuation shortly after it launched its IPO, driving it beyond institutional valuation. Image File history File links Question_book-3. ... Bill Hambrecht (born 1935) is an American investment banker and chairman of W.R. Hambrecht & Co. ... Dutch auction is a type of auction where the auctioneer begins with a high asking price which is lowered until some participant is willing to accept the auctioneers price, or a predetermined reserve price (the sellers minimum acceptable price) is reached. ... This article is about the corporation. ...


Pricing

Historically, IPOs both globally and in the US have been underpriced. The effect of underpricing an IPO is to generate additional interest in the stock when it first becomes publicly traded. This can lead to significant gains for investors who have been allocated shares of the IPO at the offering price. However, underpricing an IPO results in "money left on the table"—lost capital that could have been raised for the company had the stock been offered at a higher price. Look up flipping in Wiktionary, the free dictionary. ...


The danger of overpricing is also an important consideration. If a stock is offered to the public at a higher price than the market will pay, the underwriters may have trouble meeting their commitments to sell shares. Even if they sell all of the issued shares, if the stock falls in value on the first day of trading, it may lose its marketability and hence even more of its value.


Investment banks, therefore, take many factors into consideration when pricing an IPO, and attempt to reach an offering price that is low enough to stimulate interest in the stock, but high enough to raise an adequate amount of capital for the company. The process of determining an optimal price usually involves the underwriters ("syndicate") arranging share purchase commitments from lead institutional investors. ...


Issue price

A company that is planning an IPO appoints lead managers to help it decide on an appropriate price at which the shares should be issued. There are two ways in which the price of an IPO can be determined: either the company, with the help of its lead managers, fixes a price or the price is arrived at through the process of book building.


Note: Not all IPOs are eligible for delivery settlement through the DTC system, which would then either require the physical delivery of the stock certificates to the clearing agent bank's custodian, or a delivery versus payment ("DVP") arrangement with the selling group brokerage firm. This information is not sufficient. The Depository Trust & Clearing Corporation (DTCC), based primarily in 55 Water Street in New York City, is the world’s largest post-trade infrastructure organization. ... Delivery versus payment is used to classify a business transaction. ...


Quiet Period

Main article: Quiet period

There are two time windows commonly referred to as "quiet periods" during an IPO's history. The first and the one linked above is the period of time following the filing of the company's S-1 but before SEC staff declare the registration statement effective. During this time, issuers, company insiders, analysts, and other parties are legally restricted in their ability to discuss or promote the upcoming IPO.[1] The term quiet period, also known as a waiting period has historically [meant], a quiet period extended from the time a company files a registration statement with the SEC until SEC staff declared the registration statement effective. ... The SEC form S-1 is used by public companies to register their securities with the U.S. Securities and Exchange Commission (SEC). ...


The other "quiet period" refers to a period of 40 calendar days following an IPO's first day of public trading. During this time, insiders and any underwriters involved in the IPO, are restricted from issuing any earnings forecasts or research reports for the company. Regulatory changes enacted by the SEC as part of the Global Settlement, changed the quiet period to 40 days from 25 days on July 9, 2002. When the quiet period is over, generally the lead underwriters will initiate research coverage on the firm. SEC redirects here. ... The Global Settlement was a legal settlement reached to resolve issues of conflict of interest at brokerage firms. ... is the 190th day of the year (191st in leap years) in the Gregorian calendar. ... Also see: 2002 (number). ...


Largest

NTT may refer to Nippon Telegraph and Telephone The New Technology Telescope in La Silla, Chile. ... Visa or VISA has several meanings: Look up visa in Wiktionary, the free dictionary Visa (document) — a document required to enter a specific country. ... AT&T Wireless Services, Inc. ...

See also

The dot-com bubble was a speculative bubble covering roughly 1995–2001 during which stock markets in Western nations saw their value increase rapidly from growth in the new Internet sector and related fields. ... The primary is that part of the capital markets that deals with the issuance of new securities. ... In finance, financial markets facilitate: The raising of capital (in the capital markets); The transfer of risk (in the derivatives markets); and International trade (in the currency markets). ... A reverse merger is a method by which a private company can become a publicly traded company without the expense and time requirements involved in an initial public offering (IPO). ... The secondary market is the financial market for trading of securities that have already been issued in an initial private or public offering. ... A Secondary Market Offering is an issuance of stock subsiquent to the Initial Public Offering. ... Thomson Financials standard league tables are rankings of Investment Banks in terms of the dollar volume of deals they work on. ... The SEC form S-1 is used by public companies to register their securities with the U.S. Securities and Exchange Commission (SEC). ... Eat pizza everyday. ... A Green Shoe, also known by its legal title as an over-allotment option (the only way it can be referred to in a prospectus), gives underwriters the right to sell additional shares in a registered securities offering if demand for the securities is in excess of the original amount... A Reverse Greenshoe is a special provision in an IPO prospectus, which allows underwriters to sell shares back to the issuer. ...

References

  1. ^ "Quiet Period", Securities and Exchange Commission, August 18, 2005. Retrieved on 2008-03-04. "The federal securities laws do not define the term "quiet period," which is also referred to as the "waiting period." However, historically, a quiet period extended from the time a company files a registration statement with the SEC until SEC staff declared the registration statement "effective." During that period, the federal securities laws limited what information a company and related parties can release to the public." 
  2. ^ "The Largest IPO in History", Motley Fool, October 27, 2006. Retrieved on 2008-03-04. "You might not have even known that it was happening, but a record of sorts was set overnight. The Industrial and Commercial Bank of China (Hong Kong: 1398) held its long-awaited initial public offering, which, amazingly enough, was the largest one ever, raising a whopping $19 billion." 
  3. ^ "Pricing the 'biggest IPO in history'". 

The Securities and Exchange Commission, commonly referred to as the SEC, is the United States governing body which has primary responsibility for overseeing the regulation of the securities industry. ... is the 230th day of the year (231st in leap years) in the Gregorian calendar. ... Year 2005 (MMV) was a common year starting on Saturday (link displays full calendar) of the Gregorian calendar. ... 2008 (MMVIII) is the current year, a leap year that started on Tuesday of the Anno Domini (or common era), in accordance to the Gregorian calendar. ... is the 63rd day of the year (64th in leap years) in the Gregorian calendar. ... The Motley Fool is a commercial website about stocks, investing, and personal finance. ... is the 300th day of the year (301st in leap years) in the Gregorian calendar. ... Year 2006 (MMVI) was a common year starting on Sunday of the Gregorian calendar. ... 2008 (MMVIII) is the current year, a leap year that started on Tuesday of the Anno Domini (or common era), in accordance to the Gregorian calendar. ... is the 63rd day of the year (64th in leap years) in the Gregorian calendar. ...

Further reading

  • Gregoriou, Greg (2006). Initial Public Offerings (IPOs). Butterworth-Heineman, an imprint of Elsevier. ISBN 0-7506-7975-1. 
  • [1] Goergen, M., Khurshed, A. and Mudambi, R. 2007. The Long-run Performance of UK IPOs: Can it be Predicted? Managerial Finance, 33(6): 401-419.
  • [2] Loughran, T. and Ritter, J.R. 2004. Why Has IPO Underpricing Changed Over Time? Financial Management, 33(3): 5-37.
  • [3] Loughran, T. and Ritter, J.R. 2002. Why Don't Issuers Get Upset About Leaving Money on the Table in IPOs? Review of Financial Studies, 15(2): 413-443.
  • [4] Khurshed, A. and Mudambi, R. 2002. The Short Run Price Performance of Investment Trust IPOs on the UK Main Market. Applied Financial Economics, 12(10): 697-706.
  • [5] Minterest.com
  • [6] Bradley, D.J., Jordan, B.D. and Ritter, J.R. 2003. The Quiet Period Goes Out with a Bang. Journal of Finance, 58(1): 1-36.
  • [7] M.Goergen, M., Khurshed, A. and Mudambi, R. 2006. The Strategy of Going Public: How UK Firms
    Choose Their Listing Contracts. Journal of Business Finance and Accounting, 33(1&2): 306-328.
  • [8] Mudambi, R. and Treichel, M.Z. 2005. Cash Crisis in Newly Public Internet-based Firms: An Empirical Analysis. Journal of Business Venturing, 20(4): 543-571.

External links

  • The IPO Quiet Period Revisited
  • Bring Your Company Public
  • IPO prospectus

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