An Initial Public Offering or IPO targets both small and big investors. It refers to the first public offering by a limited company to list its shares on a stock exchange. A soon as the shares of the company get listed on the capital market, the value of its shares is determined and public trading of those shares begins. Issued by a company as common stocks or shares, IPO targets to achieve finances required for growth and expansion of a company. Usually an IPO targets to tap a wide pool of investors in the stock market to accumulate large volume of capital. The issuing company through its IPO add new shareholders and guarantee them a share in its future profits. Such issuing also makes the shares of existing stake holders more valuable in absolute terms.
IPO Target And Objective
A company makes an IPO primarily when it needs capital and its IPO targets to achieve funds to finance expansion of a company. This route is mostly taken by companies in a growth stage and looking for rapid expansion. Often such companies lack means to mobilise internal resources and cannot ask for more loans. The only alternative left for it is to acquire funds through its equity. Thus it offers its shares for the first time to the public for trading with the objective to raise necessary capital.
In certain cases, an IPO targets to dilute some of the shareholding. One can issue an IPO when there is an offer to sale a part or whole of the company. A company has several promoters. If an existing promoter wants to offload his stake in the company by making public offering, he goes for listing. In this case, the company does not gain any capital except the fact that an IPO determines the value of its shares. This kind of IPO is often seen in developing countries where governments nowadays go for disinvestment of public sector undertakings. As the dominant shareholder in public enterprises, the government issues an IPO to dilute its stakes in parts. Such an IPO targets both people and private promoters.
IPO Process
An IPO targets to fund the growth plans. A company goes through a three-stage process to make an IPO, pre-IPO transformation, IPO transaction and post-IPO transaction phase. Not all can issue IPOs. Only publicly listed companies can make IPOs. The pre-IPO transformation refers to necessary restructuring of a company to make it a publicly traded company. Its IPO target can only be achieved when investors have confidence on its management and business strategy. Therefore the company should have the management in place that can maximize shareholders’ trust and achieve IPO target value. However, the change in the top management is not only helpful, the company needs to introspect on its business strategy, organizational details and corporate governance and make it investor friendly. Its IPO target can only achieved only when investors find investing in its shares profitable.
Once the investor-friendly groundwork is made, the company can go for achieving its IPO target. It has to hire reputed accounting and law firms to do the paper work related to filing. It has to present
- Complete business plan detailing management team, debt position, critical processes and factors important in the success of the business.
- Corporate profile describing company’s finances, business goals, principals and market potential.
- All the financial details including economic analysis, audited statements, net profit margins ratio analysis.
- It is essential to have underwriters to achieve IPO target. A reputed investment banker is hired for this job.
Once the filing is over, public declaration regarding the date of IPO is made. An IPO target is declared effective two days after investors receive proposals and the offering price is set. The lead underwriter looks after the smooth trading during the initial days. They are empowered to legally support the stock price by buying shares themselves. An IPO is said to be completed seven days after its public trading. In the post-IPO phase, a company needs to steer its business and maintain good investor relation.
Factors To Watch Before Investing in IPOs
An IPO target is set to attract investors. But the investors need to consider certain important points before going to buy it.
- Use of proceeds: An IPO document explains how the proceeds of the IPO target will be used. This tells about how the company is serious about growth.
- Underwriting: An important underwriter is sine qua non of a strong IPO. It manages the IPO target fund and the more popular is the underwriter, the more are the chances of profit.
- Earning: Earnings drive investments. You must calculate earning potential before subscribing any IPO.
- Promoters: Promoters of a company drive its growth and price of shares. The bigger the promoters are, the better is the chance of good management and profit earning. The investors must also analyze the IPO target to know whether the promoter is a liability or asset. The promoters should not be into legal tangles.
- Financial Details: It is important to look the financial records of the company. One has to analyze the price earning ratio based on the past revenues and estimate prospective ratio. This will give a glimpse of how fast a company’s revenues will grow. This helps in calculating your return on investment.
- Balance Sheets: Look for fixed assets, investments, loans and advances of the company on its balance sheet. Check the credential of auditors also.
- Status of Issuing Company: Whether it is a holding company or the main company.
Tips for IPO Spot Winners
An IPO target has the sole objective of acquiring capital. On the other hand, an investor wants to gain the maximum. It is necessary that the investors remain cautious and be selective while investing in IPOs. The four crucial factors need to be studied in any IPO offer are promoter, performance, prospects and price. Unless the company makes profits, your investment will not bring any dividend. Therefore, investors make sure that the company planning IPO target is a good bet to invest your hard earned money.