IPO stands for initial public offering. It is when a company first sells shares of stock to the public. This is also know as going public and is the first time that the owners give up all or part of the ownership to shareholders.
Unlike the '90s, where it seemed anyone with a website could go public, these days it is typically a good sign for the economy, shareholders and the company. It is an indication that the company is doing well and requires additional capital to continue to grow. The owners, senior executives, and initial investors typically award themselves the largest percentage of the stock and usually stand to make millions, if not billions. Money from the IPO goes to fund the growth of the company, often a huge expansion or acquisition.
An IPO is also a great way for a company to retain and attract valuable talent. It is often used to suppress wages and salaries with the promise of a rewarding 'cash out' when the IPO occurs. Once a company goes public, it can offer stock as an ESOP (employee stock ownership plan), ESPP (employee stock purchase plan) or grant public share options wrapped in a wide range of incentive and compensation plans.
Unlike the '90s, where it seemed anyone with a website could go public, these days it is typically a good sign for the economy, shareholders and the company. It is an indication that the company is doing well and requires additional capital to continue to grow. The owners, senior executives, and initial investors typically award themselves the largest percentage of the stock and usually stand to make millions, if not billions. Money from the IPO goes to fund the growth of the company, often a huge expansion or acquisition.
An IPO is also a great way for a company to retain and attract valuable talent. It is often used to suppress wages and salaries with the promise of a rewarding 'cash out' when the IPO occurs. Once a company goes public, it can offer stock as an ESOP (employee stock ownership plan), ESPP (employee stock purchase plan) or grant public share options wrapped in a wide range of incentive and compensation plans.
IPOs can be extremely stressful on the organization. Traditionally, costs must be kept low, revenues up, employees are expected to produce more with less and company leaders may become distracted putting additional strain on human and financial capital. Internal competition and stress are prevalent between the haves and have nots. Everyone is on edge, and strain increases, as the date gets closer. It is an expensive process both financially and emotionally.
Total value is often an unknown to participants. While grants may look great on paper, the true value, post IPO, is often difficult to calculate. Timeline to exercise is also a disadvantage. In an effort to avoid a mass 'sell off', and the possible perception of lack of confidence by senior management, ability to sell shares may be years away. Also, post IPO, who is the actual owner of the company, who has the controlling interest? IPOs may be used as a For Sale sign with willing suitors making an M&A play.
Private companies face intense scrutiny. Prior, they may have only had to answer to a select group of investors. A Public company is under intense scrutiny by the media, analysts, SEC, regulators and regulations such as the Sarbanes-Oxley Act and the all unforgiving shareholder. Huge amounts of data about the officers and the company can give competitors a view not previously visible.
Total value is often an unknown to participants. While grants may look great on paper, the true value, post IPO, is often difficult to calculate. Timeline to exercise is also a disadvantage. In an effort to avoid a mass 'sell off', and the possible perception of lack of confidence by senior management, ability to sell shares may be years away. Also, post IPO, who is the actual owner of the company, who has the controlling interest? IPOs may be used as a For Sale sign with willing suitors making an M&A play.
Private companies face intense scrutiny. Prior, they may have only had to answer to a select group of investors. A Public company is under intense scrutiny by the media, analysts, SEC, regulators and regulations such as the Sarbanes-Oxley Act and the all unforgiving shareholder. Huge amounts of data about the officers and the company can give competitors a view not previously visible.
An IPO could take up to a year to execute and cost millions in fees. Most companies establish a project manager and project team. This team is not limited to investment banker(s), lawyers, financial analysts, accountants and hopefully an SEC expert to deal with regulatory hurdles.
Once the IPO team is in place, they will start putting together all the required financial information. Extreme cost cutting is also a possibility as the team identifies unprofitable assets for write-off and areas where cash flow can be maximized. Don't be surprised if a massive structural reorganization takes place, maybe even an entirely new management team and new board of directors. Revenue growth momentum must be maintained, regardless of cost.
Months prior to the announcement, companies do 'road shows' highlighting the prospectus and circulating it for feedback. A way to test the waters. When the IPO is close, the company joins the exchange it intends to issue the IPO through. The final month will see the company filing its prospectus with the SEC, sends the press release and sells the stock.
Stage One: File S-1with the SEC.
Stage Two: Underwriters are selected. Investment bankers who help to raise capital from investors are selected.
Stage Three: Exchange - select the exchange where the shares will be traded. Select the ticker symbol.
Stage Four: Road Show seeking investors for large blocks of shares.
Stage Five: Preparation- once the SEC approves, the number of shares and price is set.
Stage Six: Go Public - investment capital is transferred to the company and investors get their shares. The following day, the shares are traded on the market.
Once the IPO team is in place, they will start putting together all the required financial information. Extreme cost cutting is also a possibility as the team identifies unprofitable assets for write-off and areas where cash flow can be maximized. Don't be surprised if a massive structural reorganization takes place, maybe even an entirely new management team and new board of directors. Revenue growth momentum must be maintained, regardless of cost.
Months prior to the announcement, companies do 'road shows' highlighting the prospectus and circulating it for feedback. A way to test the waters. When the IPO is close, the company joins the exchange it intends to issue the IPO through. The final month will see the company filing its prospectus with the SEC, sends the press release and sells the stock.
Stage One: File S-1with the SEC.
Stage Two: Underwriters are selected. Investment bankers who help to raise capital from investors are selected.
Stage Three: Exchange - select the exchange where the shares will be traded. Select the ticker symbol.
Stage Four: Road Show seeking investors for large blocks of shares.
Stage Five: Preparation- once the SEC approves, the number of shares and price is set.
Stage Six: Go Public - investment capital is transferred to the company and investors get their shares. The following day, the shares are traded on the market.
An IPO is an opportunistic time for those in the know. Shares are usually only available to those who know about it, or to those who can access the shares. It's nice to be in on the ground floor if the stock skyrockets, dump and run. One downfall is there may be a restriction on the sale of stock for a certain length of time. It could also flash and crash.
The IPO volume is usually a good indication of a healthy economy and a robust market. In a recession, IPO volume drops as stock prices are depressed. With our markets in one of the best bull runs, the IPO landscape is looking green. You in? Sua Sponte.
Bradford C. Bruner for Sua Sponte Wealth Management
The IPO volume is usually a good indication of a healthy economy and a robust market. In a recession, IPO volume drops as stock prices are depressed. With our markets in one of the best bull runs, the IPO landscape is looking green. You in? Sua Sponte.
Bradford C. Bruner for Sua Sponte Wealth Management
