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

purpose of ipo

An initial public offering (IPO) is the process through which a privately held company issues shares of stock to the public for the first time. Also known as "going public," an IPO transforms a business from a privately owned and operated entity into one that is owned by public stockholders. An IPO is a significant stage in the growth of many businesses, as it provides them with access to the public capital market and also increases their credibility and exposure. Becoming a public entity, however, also involves significant changes for a business including a loss of flexibility and control for management. In some cases an IPO may be the only means left of financing rapid growth and expansion. The decision to go public is sometimes influenced by venture capitalists or founders who wish to cash in on their early investment

investment banks role

One of the primary roles of an investment bank is to serve as a sort of intermediary between corporations and investors through initial public offerings (IPOs). Investment banks provide underwriting services for new stock issues when a company decides to go public and seeks equity funding. Underwriting basically involves the investment bank purchasing an agreed-upon number of shares of the new stock, which it then resells through a stock exchange.

Part of the investment bank's job is to evaluate the company and determine a reasonable price at which to offer stock shares. IPOs, especially for larger companies, commonly involve more than one investment bank. This way, the risk of underwriting spreads across several banks, reducing the exposure of any single bank and requiring a relatively lower financial commitment to the IPO.

Latest ipo

Saudi armaco ipo: State-owned oil giant Saudi Aramco has raised a record $25.6bn (£19.4bn) in its initial public offering in Riyadh.The share sale was the biggest to date, surpassing that of China's Alibaba which raised $25bn in 2014 in New York.

Snowflakes ipo:

Snowflake's IPO eclipses that of Royalty Pharma , which so far was the biggest IPO of 2020, and underscores the recent rebound in the U.S. market for new stocks after the COVID-19 pandemic prompted several companies to put IPO plans on hold.

Advantages and disadvantages

Advantages

Let’s start with the benefits the initial public offering provides. First of all, it gives access to risk capital. The majority of companies find it difficult to raise equity from venture capitalists or other prominent investors. In such cases, it is more affordable and convenient for companies to seek investment from the public, who might be valuing the company generously. further more, the public image of the company also increases once it is publicly listed. From the company’s perspective, it will also gain awareness and become more financially stable as financial institutions will start to lend more money. One of the most essential and advantageous characteristics of IPO is that it gives entrepreneurs an opportunity to liquidate a part of their holdings.

Disadvantages

Along with advantages, there are also disadvantages a company may face when issuing an IPO. First and foremost, there is loss of control, as with the entrance in the market, the number of shareholders increases. It means the founders and first equity holders lose control over the company. Going public, in other words, means selling ownership to other people outside the company. And once the ownership rights are shared within other individuals, it means the sole shareholder is no longer under control to make decisions autonomously.

Due to federal law, there are also put restrictions on board to ensure its complete independence from inside of the company. Next, as the company goes bigger and releases IPO, the costs also increase. As your company goes public, the regulations become stricter and place your company under the supervision of the Securities and Exchange Commission. Accordingly, your company incurs costs, which may not have incurred before. Typical expenses include issuing costs, auditing costs as well as other market information costs.

Once your company goes public, the reporting requirements also change. It means you must make extensive quarterly as well as annual disclosures about the operational, financial and other internal matters. By reporting such matters, you ensure complete transparency among the firm and the public so they are sure what they are putting their money into.