What does Google, Microsoft and Dell have in common? these three well established companies, along with other large business organizations have went public before through the IPO or initial public offering.
So what is an IPO?
In financial terms, IPO or initial public offering is the first issuance of a company’s shares to the general public usually to interested investors. these shares are allowed to be transacted in the stock market where they can be brought and sold.
One thing to note is the shares allocated to the public do not constitute 100% of the company’s shares. only a certain percentage is allocated to the public. usually the company owner or the board of directors will still hold the majority of the shares.
So why does a company offer an IPO?
One of the most common reasons companies offer IPO is to raise capital for the company. the main reason is because companies plan to use the money gathered from IPO to further expand their business or to increase their business operations.
While IPO may sound like a good way for companies to raise money, they are disadvantages as well. the chief disadvantage is there are heavy legal compliance and financial regulations that needs to be followed strictly.
The first step for any company to offer an IPO is to get several investment banks as underwriters. the purpose of underwriters is to assess the business, operational and financial background of the company in order to determine the value of the company’s shares to be sold to the public. Once it is agreed, the company will sign an agreement with the lead underwriter to sell shares on the market and the underwriters can proceed to sell these shares to any interested investors.
For large corporations dealing with billions of dollars of shares, several large investment banks may act as underwriters. these banks are paid commissions for shares that they sell. the underwriters will also help the company deal with the legal and financial regulations imposed by the country.
Most multinational companies that plan to hold an IPO will also need to comply with the rules and regulations of different countries therefore sometimes law firms may also be involved in some cases.
Once the IPO is successfully launched, companies will need to submit their annual business earnings reports to the financial securities board since the company’s shares will be listed in the stock market.