What are IPOs?
What are IPOs – IPO stands for Initial Public Offering. This signifies a private corporation going through a stock distributing process to offer shares to the public. The shift from private to public is pivotal for many corporations and can reveal the value of the company to private investors.
What has it done for others, and what can it do for me?
The first IPO in the United States originated with the Bank of North America around 1783 and even earlier for the world when the Dutch East India Company went public in the early 1600s. Since their early use, IPOs serve as the catalysts for growing business. Having been around for many centuries, the process of turning a private company public can bring about significant amounts of capital and notoriety.
Many recognizable companies have completely embraced the IPO to grow their company. Some examples include; Facebook, Visa Inc, Alibaba Group Holding Limited, and General Motors. In fact, the General Motors Company went public back in November of 2010, after emerging from a bankruptcy filing one year earlier. Yet despite their previous bankruptcy, the U.S.-based car manufacturer corporation raised $20.1 billion in its IPO.
Recently in 2020, the healthcare company One Medical opened its doors to the world of IPOs. With over 18 locations, the company provides healthcare through a membership-based primary care practice. The company has drastically changed its worth and accessibility to the public in just a year. The statistics speak volumes for the impact the IPO has made on One Medical stock.
|One Medical: before going public |
Worth: estimated around 1 Billion
IPO date: Jan. 30, 2020
IPO price: $14
|One Medical: now after IPO |
Worth: estimated around 2.1 Billion
IPO valuation: $1.7 billion
EOY Price: $43.26
Like the example with One Medical above, there are many advantages that an IPO can bring to your company. There are five main advantages that you should take into account when contemplating going public. Morgan Hunsaker of IPOhub.org summarizes it best in an article from 2017;
The most often cited advantage of an initial public offering is money. In 2016, the median proceeds received from an initial public offering were $94.5 million, and many offerings bring in hundreds of millions of dollars. For example, in 2016, the largest IPO—ZTO Express—netted $1.4 billion. The proceeds from an IPO provide ample justification for many companies to go public even without looking at the other benefits, especially considering the many investment opportunities available because of the new capital. These funds can benefit a growing company in countless ways. Companies may use an initial public offering to finance research and development, hire new employees, build buildings, reduce debt, fund capital expenditure, acquire new technology or other companies, or bankroll any number of other possibilities. The money provided by an IPO is significant and can transform the growth trajectory of a company.
Every company has stakeholders who have contributed significant amounts of time, money, and resources with the hopes of creating a successful company. These founders and investors often go for years without seeing any significant financial return on their contributions. An initial public offering is a significant exit opportunity for stakeholders, whereby they can potentially receive massive amounts of money, or, at the very least, liquefy the capital they currently have tied up in the company. As stated in the previous paragraph, initial public offerings often raise nearly $100 million (or even more), which makes them very attractive to founders and investors who often feel that it is time to receive financial compensation for years of “sweat equity.” It is, however, important to note that for founders and investors to receive liquidity from an IPO, they will have to sell their shares of the now-public company on secondary exchange (e.g., New York Stock Exchange). Shareholders do not immediately receive liquidity from the proceeds of an IPO.
Publicity And Credibility
If a company hopes to continue to grow, it will need increased exposure to potential customers who know about and trust its products; an IPO can provide this exposure as it thrusts a company into the public spotlight. Analysts around the world report on every initial public offering to help their clients know whether to invest and many news agencies bring attention to different companies that are going public. Not only do companies receive a great deal of attention when they decide to go public, but they also receive credibility. A company must go through intense scrutiny to ensure what they are reporting about themselves to complete an offering. This scrutiny, combined with many individuals’ tendencies to trust public companies more, can lead to increased credibility for a company and its products.
Reduced Overall Cost Of Capital
A major obstacle for any company, but especially younger private companies, is their cost of capital. Before an IPO, companies often have to pay higher interest rates to receive loans from banks or give up ownership to receive funds from investors. An IPO can lessen the difficulty of receiving additional capital significantly. Before a company can even begin its formal IPO preparation process, it must be audited according to PCAOB standards; this audit is normally more scrutinizing than any prior audits and fosters greater confidence that what a company is reporting is accurate. This increased assurance will likely result in lower interest rates on loans received from banks, as the company is perceived as being less risky. On top of lower interest rates, once a company is public, it can raise additional capital through subsequent offerings on the stock exchange, which is usually easier than raising capital through a private funding round.
Stock As A Means Of Payment
Being a public company also allows for the use of publicly-traded stock as a means of payment. While a private company has the ability to use its stock as a form of payment, the private stock is only valuable if a favorable exit opportunity arises. On the other hand, the public stock is essentially a form of currency that can be bought and sold at a market price at any moment, which can be helpful when compensating employees and acquiring other businesses. For a company to thrive, it must hire the right employees. The ability to pay employees with stock or offer stock options allows a company to be competitive when trying to hire top-tier talent, even if the base monetary salary is lower than what competitors are offering. Additionally, acquisitions are often an important way for companies to continue to grow and stay relevant. However, acquiring other companies is normally very expensive. When a company is public, it has the option to issue shares of its stock as a means of payment, rather than using millions of dollars of cash.
How Do I Go public?
- First, you should select an investment bank that has the industry expertise to provide advising services.
- Second, make commitments with your underwriter (investment bank) to sell your initial set of shares. Four types of commitments will be offered.
- Firm Commitment, which is when the underwriter purchases the whole offer and resells the shares to the investing public. Best Efforts Agreement, which is when the underwriter does not guarantee they will raise a certain amount for the issuing company. All or None Agreement, where all offered shares must be sold or the offering is canceled. Syndicate of Underwriters, when public offerings can be managed by one underwriter or by multiple managers. When there are multiple managers, one investment bank is selected as the lead manager. This diversifies the risk of an IPO among multiple banks.
- Other documents such as an Engagement Letter, Letter of Intent, Registration Statement, and more will be filled as well.
- After the IPO passes SEC approval, the date is decided and the company can decide the initial pricing for shares.
These steps are just a brief overview of the process of transforming a corporation into a successful publicly-traded company. If you require capital or want to boost your company’s profile, consider looking into that initial public offering.