An initial public offering (IPO) is the first time that the stock of a private company is offered to the public. It creates liquid market for the shares of the company and a way for its shareholders to sell their shares easily on the stock market after the IPO is successfully completed.
An IPO makes it possible for a company to have a publicly available valuation of its stock. That helps it to rise capital and fund its expansion plans, for example by merging with or acquiring other companies. A successful IPO for a company means that it will be able to rise additional capital easily in the future.
However IPOs bear risks, because the value of the shares can either increase or decrease and therefore investors may gain or loose money.
When a private company becomes public, it has thousands of shareholders, meaning that it becomes a subject to strict rules and regulations. Public companies have traditional organization structure with a board of directors, who are responsible before the shareholders and have to report the auditable financial and accounting information every quarter. Such organizations are required to report to governing bodies such as SEC (Securities and Exchange Commission) in the US.
There are definite benefits for companies listed on a major stock exchanges. Such companies carry a significant level of prestige. Years ago only private companies with strong fundamentals and proven profitability potential could qualify for an IPO and it wasn’t easy to get listed. Today, with competition among many stock exchanges, listing requirements have eased.
Public companies tend to become more visible than private companies, and going public often increases the public’s awareness of a company. Therefore IPOs are actually great branding events that can be leveraged to help the business. A listing on a stock exchange with the accompanying disclosures as well as media coverage can heighten the awareness of a company’s products and services among the business and financial community, and consumers.
A successful IPO carries more funds and additional capital for a company willing to invest in advertising, development of new products, research, expansion of business operations and most importantly – growing the business and taking new opportunities.
Certainly, there are many options for a company to raise additional capital – borrowing, bank loan, finding private investors, or being acquired by another company, but, the IPO raises the largest sums for the company and its early investors.
This was the case with the biggest IPO by far – the Alibaba Holdings Group IPO – the diversified online e-commerce company based in China. Alibaba went public on September 18, 2014 with share price of US $68. The public offering raised US $25 billion with a current share price of US $157 and current market value 3 years after the IPO – US $264 billion.
At that time Alibaba Holdings Group failed to meet the listings requirements of Hong Kong stock exchange and therefore listed its American depository shares on the New York Stock Exchange (NYSE) instead.
The Alibaba Group accounts for 60% of all packages posted in China and 80% of all Chinese online transactions, and has around 47,000 employees. After its IPO, Alibaba significantly expanded its business and today it is the world’s biggest online commerce company, not just China’s. On top of its core sites it owns alipay.com – the Chinese equivalent of PayPal. It also has large stakes in Sina Weibo, China’s version of Twitter, as well as in Youku Tudou, the closest Chinese equivalent to YouTube.
Another successful story of initial public offering is the case of VISA. The world’s largest payment card network launched its IPO at the highest point of the financial crisis in March 2008 and in the heart of the worst offering marketing since 2001. That didn’t stop Visa’s IPO from becoming the largest U.S. IPO of all times till the present moment. The shares were valued above the expected range – at US $44 each, which raised the company US $17,9 billion. To compare, the amount raised by VISA’s IPO was more than seven times the US $2.4 billion that its archrival MasterCard had raised in its’ IPO two years prior.
Since its IPO, Visa has increased its dividend eight times and in just two years the company made it possible to become one of the Dividend Achievers – a group of 264 stocks with 10+ years of consecutive dividend increases.
Considering Visa’s unique market positioning in the financial sector that is not surprising. It does not give loans, like a bank. Instead, Visa differentiated and today resembles a global payment network, and global payments are a huge business. Visa-branded cards and payment products facilitate approximately US $6.8 trillion in global payments volume each year.
In the past decade there was one particular IPO that made everybody impatient and curious – Facebook. At an offering price of US $38 a share, Facebook’s market value at the time of its IPO was US $104 billion, which made it bigger at that time than more established companies such as McDonald’s, Citigroup and Amazon.
But Facebook’s IPO is probably remembered mostly for the trouble it faced out of the gate. On its first day of trading, the social media company encountered trading issues on the Nasdaq stock exchange and its underwriters were forced to buy shares in order to prevent the stock from falling below its offering price. However even that didn’t help and the shares of the company were traded below the IPO price for more than 14 months after its first day of trading. The lowest point was in September 2012, when the price hit a bottom of US $17.55, which was less than half the company’s initial IPO price.
Nevertheless, Facebook is now the world’s fifth-most-valuable company by market value. Its annual revenue raised from US $5 billion to more than US $30 billion.
Despite the fact that IPOs can be a risky investment, they can also bring an instant flood of capital. But becoming a public company also means opening your company to greater public scrutiny, cranky shareholders and fickle market forces.
Some of the arguments against going public include significant legal, accounting and marketing costs; the loss of control due to new shareholders, who obtain voting rights and can exercise control over company decisions thus influencing the course of the company’s strategic development.
As mentioned above, every public company is also required to disclose financial, accounting, tax, and other business information, which may be useful to competitors, suppliers and customers.
However, successful companies take risks and IPOs are just one of them, creating liquidity for shareholders and enhancing the company’s exposure, prestige, public image, and help the sales and profits.
Fortune, October 22, 2014: The 7 biggest U.S. IPOs ever – including some surprises
Bloomberg, May 18, 2017: The 5-Year Lesson of Facebook’s IPO
SOURCE: OneCoin Ltd.