IPO, or Initial Public Offering, is the company’s initial public offering on the stock exchange. The company that runs the IPO sells its shares to investors to raise additional funds for business development. The stock exchange allows the company to access a wide range of investors and increase its capitalization.
The IPO process includes the following:
- Preparing the company.
- Selecting an investment bank and a company value analyst.
- Registering a management company.
Before the IPO, each company should make an excellent preparation. It must ensure full availability of information on its activities, compile financial statements for the past few years and audit its finances. In addition, each company must select an investment bank to handle the IPO. The bank will help the company estimate its shares’ value and determine the placement price.
Valuation of the company is one of the most critical stages of preparation for an IPO. Experts conduct it with the help of various methods, such as analysis of competitors, market forecasts, and financial analysis of the company.
Based on this estimate, the placement price of shares is determined. After selecting an investment bank, the company must register a management company that will manage the placement of shares on the stock exchange.
Benefits and risks for an IPO company
- Access to additional funds. IPO helps the company to raise additional funds for business development and financing of new projects.
- Increase capitalization. The stock exchange will help the company to increase its level of capitalization and increase its market value.
- Improved reputation. IPO is a sign that the company has reached a certain level of development and is ready for further growth. This can improve its reputation and attract new customers and partners.
- High costs. The IPO is associated with high prices for the preparation of the company and the organization of stock placement on the stock exchange.
- Increasing risks. When a company becomes public, it faces many threats related to accountability, regulation, and public opinion.
- Loss of control. When a firm sells its shares on the stock exchange, it loses some control over its business, as its shareholders can influence decision-making.
What happens on the first day of trading after IPO and its importance for the company
The first day of trading after an IPO is a crucial issue for each company. Today, the price of shares is formed based on demand and supply in the market. The price may increase significantly if the request for claims exceeds the supply, and if the order is lower, the cost may decline.
This is the reason for the success of the first trading day after the IPO, and it can be an indicator of the company’s further development in the market.
Examples of successful IPO: Facebook, Alibaba, Uber
There are a lot of companies that passed the most successful Initial Public Offering and are now leaders in their industries. For example, Facebook held an IPO in May 2012, attracted more than $16 billion, and became one of the most costly companies in the world.
Alibaba had an IPO in September 2014, raising over $25 billion and becoming the world’s largest online sales company. Uber held an IPO in May 2019, raising over $8 billion and becoming a leader in the online taxi industry.
Examples of IPO failures: WeWork, Snap
However, not all companies that decide on an IPO achieve success. For example, WeWork held an IPO in September 2019 but was forced to cancel due to low share demand. Snap had an IPO in March 2017, so it got over $3 billion, but its shares began to fall just after the first day of trading.
IPO is a complex and risky process that requires careful preparation and analysis. Nevertheless, a successful IPO can bring companies great benefits, including attracting new investors and obtaining additional capital for business expansion. Companies should be prepared that the first trading day can be crucial for further market development.