Initial public offering (IPO)

Июль 30, 2022

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Initial public offering (IPO)

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2. Intro The term initial public offering (IPO) slipped into everyday speech during the tech bull market
3. Selling Stock An initial public offering, or IPO, is the first sale of stock by a
4. Private and public It usually isn't possible to buy shares in a private company. You can
5. Why Go Public? Going public raises cash, and usually a lot of it. Being publicly traded
6. Going public = sale The internet boom changed all this. Firms no longer needed strong financials
7. Going public = sale The internet boom changed all this. Firms no longer needed strong financials
8. Underwriting The Underwriting Process Getting a piece of a hot IPO is very difficult, if not
9. Negotiating The company and the investment bank will first meet to negotiate the deal. Items usually
10. Cooling off period Once all sides agree to a deal, the investment bank puts together a
11. Red herring and courtship During the cooling off period the underwriter puts together what is known
12. Finalization As the effective date approaches, the underwriter and company sit down and decide on the
13. Finalization As the effective date approaches, the underwriter and company sit down and decide on the
14. What is it for you? As you can see, the road to an IPO is a
15. What is it for you? As you can see, the road to an IPO is a
16. No History It's hard enough to analyze the stock of an established company. An IPO company
17. The Lock-Up Period If you look at the charts following many IPOs, you'll notice that after
18. Flipping Flipping is reselling a hot IPO stock in the first few days to earn a
19. Avoid the Hype It's important to understand that underwriters are salesmen. The whole underwriting process is
20. Tracking Stocks Tracking stocks appear when a large company spins off one of its divisions into
21. Tracking Stocks An initial public offering (IPO) is the first sale of stock by a company
22. Facebook Friday, May 18, 2012, was a big day for American tech giant Facebook. The social
23. AT&T Wireless AT&T Wireless, the mobile division of American telecommunications monolith AT&T, just barely squeaked in
24. Rosneft Always one to buck the global trend,Russia did it again when it took OAO Rosneft
25. The Bank of China The Bank of China (BOC) was a state-owned bank until it was
26. Deutsche Telekom When German telecommunications giant Deutsche Telekom AG issued its IPO on Nov. 17, 1996,
27. General Motors When do the taxpayers benefit from an IPO? When a company that owes its
28. Enel You may not have heard of Italian energy company Enel SpA, but you may have
29. VISA Ever since the consortium of banks that issued the first Visa card in 1977 became
30. NTT Mobile When NTT Mobile Communications, a giant in Japanese wireless phones, went public on the
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Intro
The term initial public offering (IPO) slipped into everyday speech during the tech bull

market of the late 1990s. Back then, it seemed you couldn't go a day without hearing about a dozen new dotcommillionaires in Silicon Valley who were cashing in on their latest IPO. The phenomenon spawned the term siliconaire, which described the dotcom entrepreneurs in their early 20s and 30s who suddenly found themselves living large on the proceeds from their internet companies' IPOs. So, what is an IPO anyway? How did everybody get so rich so fast? And, most importantly, is it possible for mere mortals like us to get in on an IPO? All these questions and more will be answered in this tutorial.

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Selling Stock
An initial public offering, or IPO, is the first sale

of stock by a company to the public. A company can raise money by issuing either debt or equity. If the company has never issued equity to the public, it's known as an IPO. Companies fall into two broad categories: private and public. A privately held company has fewer shareholders and its owners don't have to disclose much information about the company. Anybody can go out and incorporate a company: just put in some money, file the right legal documents and follow the reporting rules of your jurisdiction. Most small businesses are privately held. But large companies can be private too. Did you know that IKEA, Domino's Pizza and Hallmark Cards are all privately held?

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Private and public
It usually isn't possible to buy shares in a

private company. You can approach the owners about investing, but they're not obligated to sell you anything. Public companies, on the other hand, have sold at least a portion of themselves to the public and trade on a stock exchange. This is why doing an IPO is also referred to as "going public." Public companies have thousands of shareholders and are subject to strict rules and regulations. They must have a board of directors and they must report financial information every quarter. In the United States, public companies report to the Securities and Exchange Commission (SEC). In other countries, public companies are overseen by governing bodies similar to the SEC. From an investor's standpoint, the most exciting thing about a public company is that the stock is traded in the open market, like any other commodity. If you have the cash, you can invest. The CEO could hate your guts, but there's nothing he or she could do to stop you from buying stock.

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Why Go Public?
Going public raises cash, and usually a lot of

it. Being publicly traded also opens many financial doors:
Because of the increased scrutiny, public companies can usually get better rates when they issue debt.
As long as there is market demand, a public company can always issue more stock. Thus,mergers and acquisitions are easier to do because stock can be issued as part of the deal.
Trading in the open markets means liquidity. This makes it possible to implement things likeemployee stock ownership plans, which help to attract top talent.
Being on a major stock exchange carries a considerable amount of prestige. In the past, only private companies with strong fundamentals could qualify for an IPO and it wasn't easy to get listed.

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Going public = sale
The internet boom changed all this. Firms no

longer needed strong financials and a solid history to go public. Instead, IPOs were done by smaller startups seeking to expand their businesses. There's nothing wrong with wanting to expand, but most of these firms had never made a profit and didn't plan on being profitable any time soon. Founded on venture capital funding, they spent like Texans trying to generate enough excitement to make it to the market before burning through all their cash. In cases like this, companies might be suspected of doing an IPO just to make the founders rich. This is known as an exit strategy, implying that there's no desire to stick around and create value for shareholders. The IPO then becomes the end of the road rather than the beginning. How can this happen? Remember: an IPO is just selling stock. It's all about the sales job. If you can convince people to buy stock in your company, you can raise a lot of money.

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Going public = sale
The internet boom changed all this. Firms no

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Underwriting
The Underwriting Process
Getting a piece of a hot IPO is very

difficult, if not impossible. To understand why, we need to know how an IPO is done, a process known as underwriting. When a company wants to go public, the first thing it does is hire an investment bank. A company could theoretically sell its shares on its own, but realistically, an investment bank is required - it's just the way Wall Street works. Underwriting is the process of raising money by either debt or equity (in this case we are referring to equity). You can think of underwriters as middlemen between companies and the investing public. The biggest underwriters are Goldman Sachs, Credit Suisse First Boston and Morgan Stanley.

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Negotiating
The company and the investment bank will first meet to negotiate

the deal. Items usually discussed include the amount of money a company will raise, the type of securities to be issued and all the details in the underwriting agreement. The deal can be structured in a variety of ways. For example, in a firm commitment, the underwriter guarantees that a certain amount will be raised by buying the entire offer and then reselling to the public. In a best efforts agreement, however, the underwriter sells securities for the company but doesn't guarantee the amount raised. Also, investment banks are hesitant to shoulder all the risk of an offering. Instead, they form a syndicate of underwriters. One underwriter leads the syndicate and the others sell a part of the issue.

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Cooling off period
Once all sides agree to a deal, the investment

bank puts together a registration statement to be filed with the SEC. This document contains information about the offering as well as company info such as financial statements, management background, any legal problems, where the money is to be used and insider holdings. The SEC then requires a cooling off period, in which they investigate and make sure all material information has been disclosed. Once the SEC approves the offering, a date (the effective date) is set when the stock will be offered to the public.

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Red herring and courtship
During the cooling off period the underwriter puts

together what is known as the red herring. This is an initial prospectus containing all the information about the company except for the offer price and the effective date, which aren't known at that time. With the red herring in hand, the underwriter and company attempt to hype and build up interest for the issue. They go on a road show - also known as the "dog and pony show" - where the big institutional investors are courted.

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Finalization
As the effective date approaches, the underwriter and company sit down

and decide on the price. This isn't an easy decision: it depends on the company, the success of the road show and, most importantly, current market conditions. Of course, it's in both parties' interest to get as much as possible. Finally, the securities are sold on the stock market and the money is collected from investors.

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Finalization
As the effective date approaches, the underwriter and company sit down

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What is it for you?
As you can see, the road

to an IPO is a long and complicated one. You may have noticed that individual investors aren't involved until the very end. This is because small investors aren't the target market. They don't have the cash and, therefore, hold little interest for the underwriters. If underwriters think an IPO will be successful, they'll usually pad the pockets of their favorite institutional client with shares at the IPO price. The only way for you to get shares (known as an IPO allocation) is to have an account with one of the investment banks that is part of the underwriting syndicate. But don't expect to open an account with $1,000 and be showered with an allocation. You need to be a frequently trading client with a large account to get in on a hot IPO. Bottom line, your chances of getting early shares in an IPO are slim to none unless you're on the inside. If you do get shares, it's probably because nobody else wants them. Granted, there are exceptions to every rule and it would be incorrect for us to say that it's impossible. Just keep in mind that the probability isn't high if you are a small investor.

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What is it for you?
As you can see, the road

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No History
It's hard enough to analyze the stock of an established

company. An IPO company is even trickier to analyze since there won't be a lot of historical information. Your main source of data is the red herring, so make sure you examine this document carefully. Look for the usual information, but also pay special attention to the management team and how they plan to use the funds generated from the IPO. And what about the underwriters? Successful IPOs are typically supported by bigger brokerages that have the ability to promote a new issue well. Be more wary of smaller investment banks because they may be willing to underwrite any company.

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The Lock-Up Period
If you look at the charts following many IPOs,

you'll notice that after a few months the stock takes a steep downturn. This is often because of the lock-up period. When a company goes public, the underwriters make company officials and employees sign a lock-up agreement. Lock-up agreements are legally binding contracts between the underwriters and insiders of the company, prohibiting them from selling any shares of stock for a specified period of time. The period can range anywhere from three to 24 months. Ninety days is the minimum period stated under Rule 144 (SEC law) but the lock-up specified by the underwriters can last much longer. The problem is, when lockups expire all the insiders are permitted to sell their stock. The result is a rush of people trying to sell their stock to realize their profit. This excess supply can put severe downward pressure on the stock price.

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Flipping
Flipping is reselling a hot IPO stock in the first few days

to earn a quick profit. This isn't easy to do, and you'll be strongly discouraged by your brokerage. The reason behind this is that companies want long-term investors who hold their stock, not traders. There are no laws that prevent flipping, but your broker may blacklist you from future offerings - or just smile less when you shake hands. Of course, institutional investors flip stocks all the time and make big money. The double standard exists and there is nothing we can do about it because they have the buying power. Because of flipping, it's a good rule not to buy shares of an IPO if you don't get in on the initial offering. Many IPOs that have big gains on the first day will come back to earth as the institutions take their profits.

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Avoid the Hype
It's important to understand that underwriters are salesmen. The

whole underwriting process is intentionally hyped up to get as much attention as possible. Since IPOs only happen once for each company, they are often presented as "once in a lifetime" opportunities. Of course, some IPOs soar high and keep soaring. But many end up selling below their offering prices within the year. Don't buy a stock only because it's an IPO - do it because it's a good investment.

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Tracking Stocks
Tracking stocks appear when a large company spins off one of its divisions

into a separate entity. The rationale behind the creation of tracking stocks is that individual divisions of a company will be worth more separately than as part of the company as a whole. From the company's perspective, there are many advantages to issuing a tracking stock. The company gets to retain control over the subsidiary but all revenues and expenses of the division are separated from the parent company's financial statements and attributed to the tracking stock. This is often done to separate a high-growth division with large losses from the financial statements of the parent company. Most importantly, if the tracking stock rockets up, the parent company can make acquisitions with the subsidiary's stock instead of cash. While a tracking stock may be spun off in an IPO, it's not the same as the IPO of a private company going public. This is because tracking stocks usually have no voting rights, and often there is no separate board of directors looking after the rights of the tracking stock. It's like you're a second-class shareholder! This doesn't mean that a tracking stock can't be a good investment. Just keep in mind that a tracking stock isn't a normal IPO.

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Tracking Stocks
An initial public offering (IPO) is the first sale of stock by

a company to the public.
Broadly speaking, companies are either private or public. Going public means a company is switching from private ownership to public ownership.
Going public raises cash and provides many benefits for a company.
The dotcom boom lowered the bar for companies to do an IPO. Many startups went public without any profits and little more than a business plan.
Getting in on a hot IPO is very difficult, if not impossible.
The process of underwriting involves raising money from investors by issuing new securities.
Companies hire investment banks to underwrite an IPO.
The road to an IPO consists mainly of putting together the formal documents for the Securities and Exchange Commission (SEC) and selling the issue to institutional clients.
The only way for you to get shares in an IPO is to have a frequently traded account with one of the investment banks in the underwriting syndicate.
An IPO company is difficult to analyze because there isn't a lot of historical info.Lock-up periods prevent insiders from selling their shares for a certain period of time. The end of the lockup period can put strong downward pressure on a stock.
Flipping may get you blacklisted from future offerings.
Road shows and red herrings are marketing events meant to get as much attention as possible. Don't get sucked in by the hype.
A tracking stock is created when a company spins off one of its divisions into a separate entity through an IPO.
Don't consider tracking stocks to be the same as a normal IPO, as you are essentially a second-class shareholder.

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Facebook
Friday, May 18, 2012, was a big day for American tech

giant Facebook. The social media behemoth made its initial public offering (IPO) -- its debut as a publicly traded company -- on the New York Stock Exchange that day. In just one day of trading, Facebook sold 421.2 million shares of itself to investors for $38 apiece, amassing a cool $16 billion in new capital just about instantly [source: Bel Bruno]. Facebook's IPO became the largest tech offering – and third largest overall -- in U.S. history.

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AT&T Wireless
AT&T Wireless, the mobile division of American telecommunications monolith AT&T,

just barely squeaked in its IPO before the dot-com bubble burst. The stock market began to slide in mid-March 2000, and AT&T Wireless released its initial public offering on April 26. Other tech companies withdrew their IPOs, but AT&T gambled and went ahead with its offering. It paid off.
The wireless division's affiliation with its well-known parent certainly didn't hurt its prospects. When trading began on the NYSE, AT&T Wireless released 360 million shares. Investors fell in step with underwriters' valuation of the stock, with shares opening at $30.12 and closing at $31.75; its pre-offer value was $29.50 [source: Portnoy and Jastrow].
By the time the bell rung to close the day on the exchange, AT&T Wireless had raked in $10.62 billion in new capital [source:BusinessWeek]. It set the record for the largest IPO in American history, a title the company would hold for six years.

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Rosneft
Always one to buck the global trend,Russia did it again when it

took OAO Rosneft -- the state-owned oil company -- public. While many other large IPOs were the result of the privatization of a state-owned entity, OAO Rosneft was Russia's share sale of its own company. What's more, Russia had put the oil giant together through seized assets from private enterprises operating in the country.
A number of financiers balked at the IPO, considering it unethical. This didn't stop Russia from offering the stock -- and other investors on the Moscow and London exchanges from buying it. When OAO Rosneft went public on July 13, 2006, it attracted $10.65 billion in capital, with shares underwritten by bankers like JPMorgan and Morgan Stanley [source: BusninessWeek].
OAO Rosneft released 1.38 billion shares of itself, valued at $7.55 apiece [source: Bloomberg]. The IPO fell about $1 billion short of the company's hope to raise $11.6 billion.

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The Bank of China
The Bank of China (BOC) was a state-owned bank until it was

spun off into a publicly traded private lender during its IPO on May 23, 2006. The one-day total for purchases for shares ahead of the listing on the Hong Kong exchange the following week -- attracting everyone from the bank's everyday account holders to European banks like Royal Bank of Scotland -- topped $9.7 billion [source: Lague]. When the final tallies were in, the BOC raked in a whopping $11.1 billion during its IPO [source: BusinessWeek].
The bank issued 25.57 billion shares, comprising just 10.5 percent of the BOC, at the equivalent of about 38 cents apiece [source: Lague]. The shares sold rapidly, despite reports of 75 cases of fraud and corruption among the bank's leaders the year before. All told, Bank of China's IPO was the biggest offering in six years.

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Deutsche Telekom
When German telecommunications giant Deutsche Telekom AG issued its IPO on Nov.

17, 1996, it was the largest in European history. The company that spawned T-Mobile released more than 713 million shares of itself. By the end of the day, Deutsche Telekom had raised $12.48 billion [source: BusinessWeek].
Trading on the European exchange began on Nov. 17, 1996, and raised the value of the stock to $22.45. Investors who bought the stock as trading began and sold it an hour later made a 19 percent profit for their trouble [source: Ascarelli].
Trading of what came to be one of the hottest telecom stocks in Europe at the beginning of the dot-com bubble was heavy. It was so heavy, in fact, that the European exchange extended their daily trading hours until 7 p.m. for a full week following Deutsche Telekom's IPO [source: Ascarelli].

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General Motors
When do the taxpayers benefit from an IPO? When a

company that owes its life to a federal bailout goes public in a big way.
In December 2008, President George W. Bush threw a $50 billion lifeline to General Motors, which had been struggling (along with other American automakers) in the wake of the global economic downturn that started in 2007. Unfortunately, that assistance didn't do much to keep GM from filing for Chapter 11 bankruptcy in June 2009. As part of the company restructuring that usually follows a Chapter 11 filing, the U.S. Treasury Department agreed to loan the company another $30 billion -- in exchange for a 60-percent stake in the company once it got back on its feet [source: ProPublica]. By the following month, the newly reformed GM was ready to start operations once more.
By the following year, GM was one of the hottest companies on the planet. Investors couldn't wait to buy their way in -- and the company knew it: Less than a week before its November 2010 IPO, the company's shareholders raised the estimated share price from between $26 and $29 per share to between $32 and $33 a share [source:Isidore]. When GM finally went public on Nov. 19, 2010, the automaker raised a staggering $15.8 billion, making it the second-largest IPO in U.S. history. That cash infusion helped GM repay nearly half of its initial $50 billion bailout, which resulted in nearly $700 billion in federal revenue [source: ProPublica]. That should make the taxpayers very, very happy.

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Enel
You may not have heard of Italian energy company Enel SpA,

but you may have gotten power from them at some point. The company has a presence in 23 countries in Europe, North and South America and Asia. It's the second largest energy company in Europe and it has a customer base of 60.5 million -- about the population of the entire United Kingdom [sources:Enel SpA, BBC]. The company is also well-known as a pioneer in green energy, with investments in hydroelectric, geothermal, solar, wind and biomass power generation.
It seems that none of this was lost on investors when Enel SpA went public on Nov. 2, 1999. The formerly state-owned company was privatized just ahead of Italy's move to adopt the euro as its currency. Its IPO of 31.7 percent of the publicly traded company (3.8 billion shares) raised $16.58 billion in capital for the firm, representing 10 percent of the value of the Milan-30 blue chip business index [source: BusinessWeek].

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VISA
Ever since the consortium of banks that issued the first Visa card in

1977 became Visa International, investors chomped at the bit for the privately held American credit card giant to go public. They would have to wait 31 years before they got the chance. When Visa finally went public in March 2008, everyone expected a huge windfall for the company. Everyone was right.
On Tuesday, March 18, 2008, Visa made its initial public offering on the New York Stock Exchange. Despite going public amid the beginning of the global financial crisis, Visa managed to rack up $17.9 billion in capital. By the end of the day, the company's stock traded at $44 a share [source: Benner]. The following day, it traded at $66 [source: Kaufman].
One reason Visa's IPO was so successful was the scrupulousness with which underwriters JPMorgan and Goldman Sachs eyed buyers. The bankers vetted out investors who might have flipped the shares they bought. Quick resales would have harmed the company's capital accumulation, since the market could have become flooded with already-purchased stocks.
Visa's IPO marked the largest in U.S. history at the time, demolishing AT&T's six-year-old record of $10.6 billion.

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NTT Mobile
When NTT Mobile Communications, a giant in Japanese wireless phones, went

public on the Nikkei 225 average on Oct. 12, 1998, the Asian market was dull. The offering of stock in the company managed to bring the market back to life, however. Ten days after NTT Mobile's IPO, the Nikkei average had added 1,300 points to its 14,295 total in just a five-day span [source: WSJ]. While other Asian markets were embattled, the IPO kept the Nikkei chugging along.
The initial pre-offering value for shares in the company was 3.9 million yen; by the end of the day, they had risen to a close of 4.65 million yen. By the time the bell had rung to end the day on the Nikkei, NTT Mobile had amassed $18.4 billion in capital -- in one day. It was the largest IPO in world history [source: NYSE].
Not a bad stock to purchase considering just over a decade earlier NTT Mobile's parent company, Nippon Telegraph and Telephone, had managed to raise more than $13 billion during its own IPO in 1986.