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Initial Public Offerings Essay

531 words - 3 pages

Since the company is looking to transform from Private to Public they will need to go through the process of an Initial Public offering. An initial public offering is a company’s first time offer of common stock to the general public. As a privately held company expands it may need more funds than it can obtain through borrowing. A common first step in the case of IPO’s is to obtain private equity from venture capitalist. These investors seek to invest in firms that offer high potential growth over time. These venture capitalist typically look for investments Ranging from 2-5 years. Therefore firms will not only use IPOs to obtain new funding but also a way to offer venture capitalist to cash in on their investments.
In most cases firms ...view middle of the document...

Within 30 days of the developed prospectus the Securities Exchange Commission will assess the prospectus to determine if it has sufficient information relevant to investors. Once the prospectus has been approved by the SEC it is sent out to institutional investors who may want to invest in the IPO. These institutional investors are targeted because they may be willing to buy large amounts of shares at the time of the IPO. Because of this they are given priority over individual investors at the time of IPOs.
After this the price of the IPO must be determined. The price can be determined by a number of ways. During the road shows underwriters will use book building which is when the underwriter asks institutional investors what would be willing to pay per share at various volumes of stocks. Also it can be determined by market conditions. If firms in the same industry are priced high then the IPO will be priced high as well.

There are two main problems that come along with an IPO at this time. 1) the low interest rates and 2) the strong cash flows. The problem with the low interest rates are that investors will be less willing to invest when the return on their investment is miniscule. For many investor’s a declining stock market is not a desirable outcome. Investors wish to se their invested money increase and with a lowered expectation in growth and future cash flows of the company, investors will not get as much growth from stock price appreciation making stock ownership less desireable

Wasn’t sure how to answer the problem that” stock prices that appear strong to the underlying cash flows being generated.”
Also mention that is expensive to have an IPO

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