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INITIAL PUBLIC
OFFERING(IPO)
IPO AND ITS FAILURES

Initial Public Offering
A type of public offering where shares of stock in
a company are sold to the general public, on a
securities exchange

OR

The first sale of stock (shares) by a private
company to the public.

Reasons for IPO
 used by companies to raise expansion capital
 to possibly monetize/liquidate the investments
of early private investors
 to become publicly traded enterprises
 enhance corporate image, thus providing
visibility
 creating multiple financing opportunities:
equity, convertible debt, cheaper bank loans

Process for IPO
 First thing – hire an investment bank which
acts as underwriter
 The company and the bank then meet to
negotiate the deal
 Discuss how much amount of money a
company will raise, the type of
securities[preferred or common] to be issued

1. Select an underwriter
 An underwriter is an investment firm that acts
as an intermediary between a company selling
securities and the investing public
 The underwriter is the principal player in the
IPO
 Typically, the underwriter buys the securities
for less than the offering price and accepts the
risk of not being able to sell them

2. Negotiating the deal
 Register with SEC [Securities and Exchange
Commission]
 Red Herring – Print prospectus describing
details of issuing corporation and proposed
offering
 Road-Show – presented to
institutional/potential investors allowing firms
to raise interest and thus the price of shares

3. Pricing and Selling
 The securities are priced based on the value
of the company and expected demand for the
securities
 Examples of valuation methods:
 NetPresent Value
 Earnings/Price ratios

 A full-fledged selling effort gets under way on
the effective date of the registration statement
 A final prospectus must accompany the
delivery of securities

Is it a good time to do an IPO?
 Determinants of suitability:
 The degree of urgency for financing your
company
 The general stock market condition

 The industry market condition

 The frequency and size of all IPO’s in the
financial cycle

Financing New Ideas
 Personal savings
 Bank
 Government
 Large industrial companies
 Venture Capital Funds
 Mostly organized as private partnerships
 Need to prepare a business plan for funding
 They invest in stages to control risk
 They require board representation and get shares

IPO activity based on
Demand/Supply
 Demand-side explanation:
start-up firms with good projects cannot get
private funding and they use IPO for raising
capital

 Ifa hot issue period* is driven by demand-side for
funds then it may be advantageous for a new firm
to go public

* hot issue period - A time period with a lot of IPOs

IPO activity based on
Demand/Supply
 Supply-side explanation:
during some time periods, investors and
institutions that invest in IPOs have excess
funds to invest

 Ifa hot issue period is driven by supply-side then
a new firm may be better off delaying to go public
- competition for funds

Factors to keep in mind before
applying in an IPO
 Investors need to carefully go through the Red
Herring(preliminary prospectus) and the final
prospectus filed with the ROC
 Objects of the issues and its risk factors
 Company’s & its Promoters track record in running
a business
 Issue Price
 Capital structure of the company
 Tax benefits
 Any published reports that forecast the future
earnings

Disadvantages of the IPO
 Expensive
A typical firm may spend about 15-25% of the
money raised on direct
expenses[legal/marketing/accounting]
 Reporting responsibilities
 Public companies must continuously file reports
with the SEC and the stock exchange they list on
 Loss of control
 Ownership is transferred to outsiders who can
take control and even fire the entrepreneur
cont..

Disadvantages..
 Requirement to disclose financial and
business information
 Meaningful time, effort and attention required
of senior management
 Public dissemination of information which may
be useful to competitors, suppliers and
customers
 Risk that required funding will not be raised
 Market forces the company to sacrifice long
term gains for short term profits

Alternatives to IPO
 Strategic partnerships
 Qualified Institutional Placement (QIP)
 Private Placement of Stock and Bonds
 Reverse Mergers
 Private Equity

IPO Failures
 TheGlobe.com
- One of the first big social media websites. In 1998, at the peak of
the Internet boom floated the idea of going public, a decision that
paid off handsomely -- at first.
- The IPO stock was offered at $9 a share and skyrocketed to $65
by the end of the trading day, marking the largest single-day gain
to date -- an incredible 606%
- When the bottom fell out of the online advertising market in 2000,
citing reports of a sagging online advertising market and a
cooling of investor interest, it looked for an alternative business
model.
- In 2001, it had cut half its workforce and sold its major Web
properties.
- Current share price 25 cents.

IPO Failures
 Shanda Games
- one of the most popular online gaming market, following in the
footsteps of other Chinese companies, planned a big coming out
party with a U.S. IPO in September 2009.
- hired heavy hitting underwriters JP Morgan and Goldman Sachs
to set the IPO price and determine the number of shares to offer.
- the underwriters bumped up the total number of shared from 63
million to 83.5 million, set the opening share price at $12.50, the
very highest end of the pricing spectrum, raising a total of $1.04
billion.
- by pushing the price to the limit, they sucked up all of the
investors willing to pay top dollar, the stock took a huge and
immediate loss of 14 percent, finishing the next day down $1.75

THANK YOU

- Govind Ghiraiya

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Initial public offering(ipo)

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