Initial public offering (hereinafter referred to as IPO) is a type of public offering in which shares of a company are sold to institutional investors and usually also retail (individual) investors; an IPO is underwritten by one or more investment banks, who also arrange for the shares to be listed on one or more stock exchange. Through this process, colloquially known as floating, or going public, a privately held company is transformed into a public company.
Initial public offerings can be used: to raise new equity capital for the company concerned; to monetize the investments of private shareholders such as company founders or private equity investors; and to enable easy trading of existing holdings or future capital raising by becoming publicly traded enterprises.
Advantages of IPO
When a company lists its securities on a public exchange, the money paid by the investing public for then newly issued shares goes directly to the company (primary offering) as well as to any early private investors who opt to sell all or a portion of their holdings (secondary offerings) as part of the larger IPO. An IPO, therefore, allows a company to tap into a wide pool of potential investors to provide itself with capital for future growth, repayment of debt, or working capital.
Once a company is listed, it is able to issue additional common shares in a number of different ways, one of which is the follow-on offering. This method provides capital for various corporate purposes through the issuance of equity (see stock dilution) without incurring any debt. This ability to quickly raise potentially large amounts of capital from the marketplace is a key reason many companies seek to go public.
An IPO accords several benefits to the previously private company:
(1) Enlarging and diversifying equity base;
(2) Enabling cheaper access to capital;
(3) Increasing exposure, prestige, and public image;
(4) Attracting and retaining better management and employees through liquid equity participation;
(5) Facilitating acquisitions (potentially in return for shares of stock);
(6) Creating multiple financing opportunities: equity, convertible debt, cheaper bank loans, etc.
Requirements on IPO
Large amounts of capital have been raised in recent years by small companies that went public. However, going public isn't for every company. The ideal candidate for an IPO has both a well-established track record of steadily growing sales and earnings, and operates in an industry that's currently in the news. You may be able to go public if you have a whole lot of one of these characteristics and not much of the other--for instance, little earnings but lots of public interest characterized many internet-related IPOs during the dotcom boom.
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