What is an IPO and how does it work?

IPOs are becoming more and more familiar with companies and financial investors. So What is an IPO and how does it work and why does a company need to strive to get an IPO, let’s find out below.

What is an IPO?

An IPO (Initial Public Offering) refers to the initial public offering of stocks. Many companies choose to raise capital by issuing shares. A stock is a type of certificate or bookkeeping that certifies that a person invests in the company that issues stock.

There are many ways to issue shares such as Public (public offering) or Private (private placement). And if it is the first time the company has raised capital from the public it will be called the Initial Public Offering, or IPO for short.

Initial Public Offering (IPO) is the process of raising capital through the issuance of new shares for the first time to the public by joint stock companies.

What is the need for an IPO?

The company conducts IPO because the main reason is to increase capital for the company to expand production and business. Enterprises that want to grow need to have capital and this is the fastest and most effective way to have capital. Capital will increase significantly and open up great financial opportunities.

An IPO can also help employees in a company own a certain number of shares from their company. From there, it helps to create more solid trust as well as help employees work more effectively because they feel they are striving for their own company

In addition, IPO also brings other benefits such as:

Increase the position and reputation of the organisation – Indeed reputation is very difficult to assess, but because an IPO requires the company to be more transparent and public, especially when listing the company and is also responsible and under the securities law. Therefore, there is trust of business partners as well as lower interest payments when borrowing money.

Raising capital for the development process – The company can also mobilize a large amount of money to serve its business.

Company can easily reward leaders and employees with shares – This is more attractive to employees because they can be sold easily, thereby better recruiting talent.

Company can easily deals with mergers & acquisitions (M&A) – a public company can easily use its stock to acquire another company..

What are the risks of an IPO?

IPO risks include:

The Board of Directors and executives must be more responsible for laws, regulations, public reporting …

Increased costs such as accounting fees, issuance, intermediaries, consulting, investment banking …

Attempting to maximize transparency of information, but it is difficult to control all information presented to the public and the consequences of information value

Increased pressure to maintain the company’s growth in the face of investment from the market and shareholders.

Advantages and Disadvantages of IPO

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Advantages of an IPO

– Issuing securities to the public will create a good image and increase popularity of the company, so it will be easier and less costly to raise capital through issuing bonds and shares in future. In addition, the company’s customers and suppliers will often also become shareholders of the company and therefore the company will be very beneficial in purchasing raw materials and consuming products.

– Issuing securities to the public will increase the net asset value, help the company have a large capital source and can borrow from the bank with more preferential interest rates as well as the terms of the pledge less troublesome. Shares of public companies, for example, are easily accepted as collateral for bank loans. In addition, the issuance of securities to the public also helps the company become a more attractive candidate for foreign companies as a joint venture partner.

– Issuing securities to the public helps the company to attract and maintain a good staff because when offering securities to the public, the company always preserves a certain percentage of securities to sell to its employees. With the option to buy shares, the company’s employees become shareholders, and earn interest on capital instead of regular earnings. This makes the company’s employees work more effectively and considers the success and failure of the company to be their own success or failure.

– Issuing securities to the public, the company has a good chance to build a professional management system as well as build a clear development strategy. It is also easier for the company to find a replacement, which in turn creates management continuity. In addition, the presence of trustees who are not directly involved in operating the company also enhances checks and balances in the management and administration of the company.

– Public issuance of securities increases the quality and accuracy of company reports because company reports must be made according to common standards set by the governing body. This makes the evaluation and comparison of the company’s operating results easier and more accurate.

Disadvantages of an IPO

An IPO requires a company to disclose financial, accounting, tax, and other business information to a competitor

The market that does not accept the IPO price can cause the share price to drop right after the offering

Legal, accounting and marketing expenses are increasing dramatically

Founder will lose control of the company to new shareholders, who have the right to vote and control the company through decisions of the Board.

Some of the top largest IPOs in the world

Deutsche Telekom AG

Deutsche Telekom AG (OTC: DTEGY) is a German telecommunications company that raised more than $ 13 billion on November 17, 1996.

Visa Inc.

Visa Inc is a debit and credit card company that went public on the NYSE in March 2008, after which they received about $ 17.9 billion.

General Motors

General Motos (GM) was listed on the NYSE in November 2010 and raised nearly $ 20.1 billion in its first IPO.

Facebook

Facebook (NASDAQ: FB) is one of the largest social networking sites in the world at the moment, which went public in May 2012 and raised more than $ 16 billion.

Alibaba Group

ALibaba, an e-commerce company based in China that went public on the NYSE in September 2014, sold a whopping 21.8 billion USD.

AIA

AIA (OTC: AAIGF), an investment and insurance company headquartered in Hong Kong, has offered shares to the public on October 21, 2010, raising more than $ 17.8 billion.

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Conclusion

IPO is a quite complex financial process with high requirements but also brings great benefits in many aspects. The value it brings is not only to businesses but also to investors in the market. It is the first step in the process for a business to disclose the value of its financial activities. Hope this information will help you understand more about IPO to have an effective and appropriate financial plan.

What is an IPO and how does it work?