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Ipo

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The Initial Public Offering

(IPO)

Objectives
Define

an IPO.
Identify the advantage and
disadvantages of IPO.
Discuss the process of going public.
Differentiate the kinds of underwriting.

Initial Public Offering (IPO)


Definition:

A companys first equity


issue made available to the public.
This issue occurs when a privately held
company decides to go public
Also called an unseasoned new issue.

AN EXAMPLE
XURPAS

INC.-engage in
creation and
development of digital
products and services to
mobile end-users.

Why do companies go public?

New capital

Future capital

Almost all companies go public primarily because


they need money to expand the business
Once public, firms have greater and easier
access to capital in the future

Mergers and acquisitions

Its easier for other companies to notice and


evaluate a public firm for potential synergies
IPOs are often used to finance acquisitions

Disadvantages of the IPO


Expensive

A typical firm may spend about 15-25% of


the money raised on direct expenses

Reporting

Public companies must continuously file


reports with the SEC and the stock
exchange they list on

Loss

responsibilities

of control

Ownership is transferred to outsiders who


can take control and even fire the
entrepreneur

Is it a good time to do an
IPO?
There

are clear windows of


opportunity that open and close for IPO
issuers
Determinants of suitability:

The general stock market condition


The industry market condition
The frequency and size of all IPOs in the
financial cycle

Outline of the IPO process:


1.
2.
3.
4.
5.
6.

Select an underwriter
Register IPO with the SEC
Print prospectus
Present roadshow
Price the securities
Sell the securities

1. Select an underwriter

An underwriter is an investment firm that


acts as an intermediary between a company
selling securities and the investing public
The underwriter is the principal player in the
IPO
Typically, the underwriter buys the
securities for less than the offering price
and accepts the risk of not being able to sell
them

Underwriter Selection

Factors to consider:

Investment bankers general reputation and expertise


Quality of its research coverage
Investment banks distribution expertise - individual or
institutional
Prior banking relationships

The most common underwriting arrangement is


the firm commitment
In this case the underwriter purchases all issued
securities and then resells them to the public price differential is called the gross spread

Lead Underwriter

The lead manager plays the major role in the


IPO - scheduling, pricing, distribution of new
issue, and assembling a group of
underwriters to sell shares to the public
The syndicate members are paid a portion of
the gross spread for their participation - 60%
of the gross spread
The lead underwriter receives a fee for its
efforts that is typically 20% of the gross
spread

Types of underwriting
Firm

The underwriter buys the entire issue,


assuming full financial responsibility for any
unsold shares
Most prevalent type of underwriting in the U.
S.

Best

commitment underwriting:

efforts underwriting:

The underwriter sells as much of the issue as


possible, but can return any unsold shares to
the issuer without financial responsibility

Leading IPO Underwriters


1.
2.
3.

Goldman Sachs
Morgan Stanley
Merrill Lynch

2. Register IPO with SEC


The

firm must prepare a registration


statement and file it with the SEC
The registration statement discloses all
material information concerning the
corporation making a public offering

3. Print prospectus
The

prospectus is a legal document


describing details of the issuing
corporation and the proposed offering to
potential investors
Contains much of the information in the
registration statement
The preliminary prospectus is
sometimes called a red herring

4. Present road-show
The

road-show is presented to
institutional investors around the country
The road-show allows firms to raise
interest in the company and thus the
price
Allows the firm and its underwriters to
gather information from potential
purchasers

Marketing

Once it is filed the registration statement is


transformed into the preliminary prospectus or
Red Herring
The preliminary prospectus is used to market the
issue
The SEC has 20 days to declare the issue effective
At that point the red herring becomes a
prospectus
The company and the underwriter promote the
IPO through the road show
Road shows provide important monitoring for the
underwriter on investor demand

5. Price the securities

How much to charge for giving away a part of the


firm is very important to the issuers
The securities are priced based on the value of the
company and expected demand for the securities
Once the registration statement is approved by the
SEC then two most important items have to be
determined:
offer price
the number of shares to be sold
Examples of valuation methods:
Net Present Value
Earnings/Price ratios

6. Sell the securities


A

full-fledged selling effort gets under


way on the effective date of the
registration statement
A final prospectus must accompany the
delivery of securities

Average IPO returns over last 5


years
1996:
1997:
1998:
1999:
2000:

23%
24%
37%
276%
-7%

The End
Any Questions???

Seatwork
1.
2.
3.
4.

5.

Why do companies opt for an IPO?


What is the significant role of the Lead
Underwriters in the going public process?
What are the advantages of being listed in
the exchange? Give at least 5 reasons
If you are the CEO of the company what will
be the qualifications of the underwriter who
will handle your IPO? List at least 5
Give a short summary of the Xurpas Inc. IPO?

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