Question

What is the purpose of an initial public offering (IPO)? How does an investment bank facilitate the process? List and describe several recent IPOs. Discuss the advantages and disadvantages of an IPO. No copy and paste pls. Thank you.

Answer 1

The purpose of an Initial public offering is to raise funds for the company so that can be used for the expansion purposes. When company requires funds, it can raise by issuing debt or it can raise by issuing shares, when company raise funds for the first time in the market by issuing shares to general public it is IPO.

The investment bank acts as an bridge between the buyers of the shares and the company. It also completes all the due diligence formalities which are required to go through the IPO process. The Investment bank also sometimes acts in the capacity where by it guarantees that if there is not enough subscription for the share from the public then it will buy it.

In recent years there has been many companies which went for IPO like Lyft, UBER, ARAMCO. Saudi Aramco was one of the biggest IPO of the recent times.

The major advantage of IPO is company is able to raise large amount of funds for the investment purposes by issuing shares in the market. Comparative to debt, there is no fixed obligation for the company to pay dividend each year, the company can choose to reinvest dividend. The disadvantage associated with the IPO is it is a costly process. Not every company can generate enough demand for its product that general public is interested and the rules and regulation related to IPO are quite large and they have to go through each and every criterion before they go for IPO.