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.

Answer 1

Initial public offering is the process by which a private company can go public by sale of its stocks to general public or to institutional investors. Initial public offerings can be used to raise new equity capital for its growth and expansion and increases their credibility and exposure.

An investment bank acts as an underwriter. It serves as a sort of intermediary between corporations and investors through initial public offerings (IPOs). It helps the company establish various details such as how much money the company hopes to raise ,the type of securities that will be offered, the initial price per share etc.For a large IPO, there can be multiple investment banks involved.

Advantages:

· Enlarging and diversifying equity base

· Enabling cheaper access to capital

· Increasing exposure and public image

· Attracting and retaining better management and employees through liquid equity participation

Disadvantages:

· Significant legal, accounting and marketing costs, many of which are ongoing

· Requirement to disclose financial and business information

· Meaningful time, effort and attention required of management

· Risk that required funding will not be raised

· Public dissemination of information which may be useful to competitors, suppliers and customers.