The IPO or Initial Public Offering is the process when an unlisted company (on the stock exchange) sells new or existing securities and offers them to the public for the first time. Before the entire process is done, the company is considered to be a private company with a select number of shareholders and investors. The whole process of 'going public' is what the IPO is about, which means the company is now listed in a recognised stock exchange. The IPO process can take any time from six months to even a year.
Here are the steps the company must undertake to go public -
1. Choosing he Investment Bank
The first step in the IPO process is to choose an investment bank that can help the company plan the IPO and also help with the underwriting process. The investment bank is selected based on its reputation, the type of research it does, expertise in the industry, distribution of issued securities and even prior relationship with the investment bank.
2. Due Diligence
The investment bank does the underwriting process with an underwriter from the investment bank itself, who is basically the mediator between the holding company and the public, to help it share its shares. Public offerings can be managed by a sole underwriter or multiple managers. When there are multiple managers, one investment banks is selected as the lead, which then forms a syndicate of underwriters by forming alliances with other banks, each of them then sell a part of the IPO. This sort of an agreement arises when the lead investment bank wants to diversify the risk of the IPO amongst other banks. An underwriter must draft an engagement letter (that has the reimbursement clause and the underwriting discount) a letter of intent (full cooperation and due diligence), an underwriting agreement, the registration statement (that consists of all the information about the IPO - prospectus and all) and the red herring document.
After the IPO is approved by the SEC, the date is planned. The issuing company and the underwriter decide the offer price and the number of shares to be sold. IPOs are often underpriced the ensure the issue is fully subscribed by the public investors. An IPO that's been subscribed to 2 or 3 times is considered a good IPO.
The underwriter plays a huge role here, carrying out an after-market stabilisation, in the event of order imbalances by purchasing shares at the offer price or below it.
5. Market Competition
This is the final stage of the IPO process, and starts 25 days after the IPO, once the 'quiet period' ends. During this phase, underwriters can give estimates regarding the earning and valuation of the issuing company.
The IPO is considered to be successful if the company's market capitalisation is equal to or greater than the market capitalisation of the competitors in the market.
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