Initial Public Offering is a rigorous process where a firm decides to go public in order to enable it raise capital for the company that will enable it to fund its operations such as expansion plans, generate profits as well as make its investors happy. For the IPO to go successfully there are a number of important factors and players that come into consideration. These include investment bankers, underwriters, pricing, demand and supply among other important factors. The role of investment Banker and underwriter
Investment banker plays an integral role in the IPO process as when a firm decides to go public it must hire an investment banker to conduct the whole process on its behalf. For instance, when Twitter decided to go public, it hired Barclays Bank to conduct the IPO process on its behalf. Investment Banker and the Underwriters work hand in hand with the company that is going public. This means that, the investment banker and underwriter are the initial buyers of a company stock that is usually offered to them at discount of the offering price. Underwriters play an important role in the IPO process. For instance, they are responsible for the advertisement of the IPO to the institutional investors who then table their bids for determination. After the tabling of the bids, it is the role of the underwriters to decide how to allocate the shares to the institutional investors. In fact, they are responsible for the type of investor they want to acquire stock at the company. For instance, reputation of the institutional investor is considered while allocating shares.
Other important factors that are usually put into consideration include length of investment, that is long-term or short-term, and are the institutional investors domestic or foreign? The investment banker, normally known as the designated market maker receives orders from and takes quick look at the orders before deciding the opening price for the stock during the trading day. The opening price is then communicated to news rooms for the public who are interested in the IPO process. Once the opening price has been decided, the investment banker has the responsibility of blocking new orders from coming in. Finally but very important, it is the role of the underwriters to monitor the prices of the shares during the opening day. In fact, if the price falls below the initial offering price, the underwriters have the responsibility of chipping in so that prices do not go below the offering price. The role of originating house and a syndicate
Underwriting of securities involves two major roles, managing and selling of securities. The entity responsible for managing of securities is called the originating house. Normally, it is the banking institutions that act as the underwriters. When the negotiation of an underwriting involves a group of firms, then a syndicate is formed. A syndicate is the formation of a several brokerage firms to complete the underwriting marketing and selling of the securities. There are some advantages of forming a syndicate with one being the more brokerage firms involved results in the possibility of more institutional investors buying the securities. In addition, risks are fairly reduced as there is redistribution of risk according to the number of shares an underwriter under the syndicate is responsible for. Therefore, the two are not entirely different from one another since several underwriters when organized in one group of brokers from a syndicate that is responsible for managing and selling of shares. Pricing of issues
The pricing issues involved in IPOs are determined by number of factors. Before price are set, a firm hires an investment bank to underwrite the company, conduct market analysis such as financial standing of similar companies in the industry to establish the initial offer price. For instance, when twitter went public, it learnt a lot from the mishandling of Facebook Inc. IPO. The most integral of all this functions is the valuation that is achieved using dividend discount model valuation, and discounted cash flow valuation. Once the value of the stock has been determined, the offer price will then be set according to market survey for the demand of the stock for the company that is about to go public. Price performance of the IPO will largely depend then on the offer price as well as the demand and the supply for the same. For instance, if the offer price is close to market price then chances are the stock will most likely drop more so if investors are rational. On the other hand if the offer price is quite lower than the market price then the prices of the stock will most likely rise very fast since institutional investors will rush for the same hence raising prices The discovery period is another important factor that affects prices of the stock.
Normally the discovery period should not be more than 30 minutes as any increase to more than 1 hour tends to make prices drop since that will signify lack of rush for the IPO. Finally, technical challenges that often affect the IPO are a determinant factor. For instance, during IPO in 2012, the Nasdaq Security Market marred with huge technical failures contributing to underperformance of the much anticipated Facebook IPO. Risks involved in the public offering and how securities laws deal with them There are numerous risks that firms, owners, investors are usually faced with during the IPO process. One of the main ones is the lack of history pertaining to a particular stock to ascertain the performance of such stocks.
For example, a lot of investors who had bought Facebook shares during its IPO lost a lot of cash due overpriced stock which had no history of trading at the stock exchange. It is also important to mention that most of the IPOs involve young companies which sell their shares to institutional investors. Since institutional aim for participating in IPOs is to gain return or their investment in such young companies, they end up inflecting the price of the stock to an extent that when the retail investors rush to buy they end up making huge losses. Extremely high volume at times overwhelm the servers of some of the security market like when Facebook went public in 2012 , Nasdaq security market servers were overwhelmed by the huge volumes Possible foreign exchange risks a company may face
Global political and financial instability is the main risk that involves buying stock of some of the foreign firms. For example, in some countries foreign investors are not allowed to own significant stock. In addition, political instability coupled with financial crises in some countries is some of the risks that investors should be aware before buying IPOs in some of the foreign countries. Other risks include unfair treatment of foreign firms in some countries in terms taxation.
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Perfomance of IPOs. Hampshire: Harriman House Publishers.