Initial Public Offerings
Barry England, Steven Nesbit, Clifton Hall, Miguel Villanueva, and John Warren
FIN 370/Finance for Business
October 27, 2014
Initial Public Offerings
Private companies transform into public companies to expand and attract investors. To do this they begin selling common stock to institutional investors who then sell the stock to the general public through a securities exchange. According to Mayo, 2012, “If this sale is the first sale of common stock, it is referred to as an initial public offering (IPO).” In this essay, we will attempt to describe the initial public offering for the global firm, Facebook, Inc. We will describe the role ...view middle of the document...
The investment bank, which could be multiple firms that the company selected, is called the originating house (aka syndicate manager, managing underwriter), which selects the members of the syndicate and determines how many shares each will get, and manages the overall process.”
The syndicate as explained above as well is when a large number of investment bankers decide to combine talents it is called a syndicate. This syndicate is usually only together for the amount of time needed to sell new and often risky securities such as an IPO. The structure of the syndicate is varied but according to Corwin and Schultz (2005) “Almost all IPO syndicates include one or more co-managers and several nonmanging underwriters”. No matter what the leadership of the syndicate, there are only two basic types divided and undivided. The difference is in the divided syndicate each member is responsible for selling the offerings they receive, while in undivided each member is only responsible for a certain percentage of the unsold offerings, based on what the entire syndicate has sold. Next is the pricing of the issue.
When companies want to go public and trade on the open market, one thing they have to do is determine the price they want to the stock to be offered in the market this is called the issue. The official definition of this term is as follows. “It is the price at which a company’s shares are offered to the market for the first time (Mahendra Raj, 2002)”, which might be at par, or at a premium, or discount. When they public trading begins, the market price may be above or below the issue price. The pricing of the issue is the responsibility of the underwriter and if they cannot sell all of the securities at a specified asking price, the underwriters may be forced to sell the securities for less than they paid for them or keep the securities themselves. If a company wants to go public they must insure that the issue is properly priced. If the price is too high no one will purchase it, and if it is too low you may get a lot of people to purchase them but you will be losing money that would have been made had it be properly priced in the beginning. There are many risks involved with initial public offerings and numerous securities laws that govern them.
Many companies do not take into consideration how complex, time consuming, and risky initial public offer can be. The drive for them is the benefits if played out correctly, however accompanying this move are many restrictions and requirements. A risk of going public is that all the company’s financial records become available for everyone to see. Sometimes this information can work against a company displaying the company’s quarterly and annually reports, which anyone can distinguish their cash flow and credit merit were at times is not so positive. The company is then questioned to U.S. Securities and Exchange Commission’s oversight and regulations, to include disclosure requirements....