Question

Recently the social networking site Facebook had a successful Initial Public Offering (IPO) of its business. Write a report on the financial coverage of the financial securities. Is an IPO a primary market transaction or a secondary market transaction? Post IPO, what actions did the senior management take to maximize the shareholders’ interests? Give reasons.

Please Provide Sources

Answer 1

Initial public offering is the process by which a private company can go public by sale of its stocks to general public. It could be a new, young company or an old company which decides to be listed on an exchange and hence goes public.

Companies can raise equity capital with the help of an IPO by issuing new shares to the public or the existing shareholders can sell their shares to the public without raising any fresh capital.

A company offering its shares to the public is not obliged to repay the capital to public investors.

The company which offers its shares, known as an 'issuer', does so with the help of investment banks. After IPO, the company's shares are traded in an open market. Those shares can be further sold by investors through secondary market trading.

The difference between the primary capital market and the secondary capital market is that in the primary market, investors buy securities directly from the company issuing them, while in the secondary market, investors trade securities among themselves, and the company with the security being traded does usually not participate in the transaction.

IPO is a primary market transaction.When a company publicly sells new stocks and bonds for the first time, it does so in the primary capital market. In many cases, this takes the form of an initial public offering (IPO). When investors purchase securities on the primary capital market, the company offering the securities has already hired an underwriting firm to review the offering and create a prospectus outlining the price and other details of the securities to be issued.

The post-IPO transaction phase involves the execution of the promises and business strategies the company committed to in the preceding stages. The companies should not strive to meet expectations, but rather, beat their expectations. Companies that frequently beat earnings estimates or guidance are usually financially rewarded for their efforts. This phase is typically a very long phase, because this is the point in time where companies have to go and prove to the market that they are a strong performer that will last.