This item has been saved to your reading list. Insight into the costs of going public and being public Insight into the costs of an IPO can help outline an IPO to the board of directors, employees and other stakeholders within the company. Having a realistic expectation of the costs can help improve the budgeting process, limit surprises, and reflect a well-structured IPO timeline.
From Private to Publicly Traded Firm: The Initial Public Offering A private firm is restricted in its access to external financing, both for debt and equity.
In our earlier discussion of equity choices, we pointed out the hard bargain venture capitalists extract for investing equity in a private business. As firms become larger and their capital needs increase, some of them decide to become publicly traded and to raise capital by issuing shares of their equity to financial markets.
Staying Private versus Going Public When a private firm becomes publicly traded, Cost of ipo primary benefit is increased access to financial markets and to capital for projects. This access to new capital is a significant gain for high growth businesses, with large and lucrative investment opportunities.
A secondary benefit is that the owners of the private firm are able to cash in on their success by attaching a market value to their holdings.
Thus, owners can become very wealthy individuals overnight. These benefits have to be weighed against the potential costs of being publicly traded. The most significant of these costs is the Cost of ipo of control that may ensue from being a publicly traded firm.
In the case of Apple Computers, for instance, the two founders, Steve Jobs and Steve Wozniak, were eventually removed from management positions, largely as a consequence of stockholder disapproval with their actions.
Other costs associated with being a publicly traded firm are the information disclosure requirements and the legal requirements.
A private firm experiencing challenging market conditions declining sales, higher costs may be able to hide its problems from competitors, whereas a publicly traded firm has no choice but to reveal the information. Finally, firms may not be able to go public if they do not meet the minimum listing requirements for the exchange on which they want to be traded.
Overall, the net tradeoff to going public will generally be positive for firms with large growth opportunities and funding needs. It will be smaller for firms that have smaller growth opportunities, substantial internal cash flows, and owners who value the complete control they have over the firm.
Choosing an Investment Banker Once the decision to go public has been made, a firm generally cannot approach financial markets on its own. This is so because it is largely unknown to investors and does not have the expertise to go public without help.
Therefore, a firm has to pick intermediaries to facilitate the transaction. These intermediaries are usually investment bankers, who provide several services.
First, they help the firm meet the requirements of the Securities and Exchange Commission SEC in preparing and filing the necessary registration statements needed for the public offering.
Second, they provide the credibility a small and unknown private firm may need to induce investors to buy its stock. Third, they provide their advice on the valuation of the company and the pricing of the new issue. Fourth, they absorb some of the risk in the issue by guaranteeing an offer price on the issue; this guarantee is called an underwriting guarantee.
Finally, they help sell the issue by assembling a group called an underwriting syndicate, who try to place the stock with its clients. The underwriting syndicate is organized by one investment bank, called the lead investment bank.
There are three costs associated with an initial public offering. First, the firm must consider the legal and administrative cost of making a new issue, including the cost of preparing registration statements and filing fees. Second, the firm should examine the underwriting commission —— the gross spread between the offering price and what the firm receives per share, which goes to cover the underwriting, management, and selling fees on the issue.
This commission can be substantial and decreases as the size of the issue increases. Ritter The third cost is any underpricing on the issue, which provides a windfall to the investors who get the stock at the offering price and sell it at the much higher market price.
Ibbotson, Sindelar, and Ritterin a study of the determinants of underpricing, estimate its extent as a function of the size of the issue.
Ibbotson, Sindelar and Ritter If the only task for the issuing company were to find the investment banker who could deliver the lowest combined cost, including both underwriting commission and underpricing costs, the whole process could be opened up to auction and the investment banker that promised to deliver the highest net proceeds to the firm would be chosen.
There are several problems with this ideal scenario, however.This behavior points to another hidden cost of China’s IPO policies: floundering public companies do not face a natural “sunset” mechanism.
Rather than facing the prospects of delisting and bankruptcy, because of the high shell value, owners and managers of floundering public companies can continue to acquire and operate new businesses. IPO Pro, everything you need to know about current IPOs in one platform.
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Linas Udrys, PricewaterhouseCoopers, Los Angeles, contends that some stocks' initial public offering costs create a basis that should be amortized or recovered through a section deduction when the business that incurred the costs dissolves or is privatized.
THE HIGH COST OF IPOs DEPRESSES VENTURE CAPITAL IN THE UNITED STATES DALE A. OESTERLE* The fundamental reason for the small numbers of IPOs is the reluctance of public investors to buy IPO .
In business, the benefits come with their costs. For instance, consider the case of a person with a homemade meat business, you have to spend for raw materials like spices, meat and packing expenses and market your product, Then you have to rent a premises to sell your product.
the pros and cons of a listing (given the cost and increased regulatory burden of doing so), consider alternative methods of achieving their goals and understand the IPO process in advance.