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2 years, 10 months ago
Why the companies carry out IPO: Pluses and minuses

In the last several years on the Internet the subject IPO is widely discussed — the output of the company on the exchange often is considered as confirmation of its success. In spite of the fact that often and happens, the output on IPO has both the obvious benefits, and certain minuses and difficulties to the company — today we will consider this question in more detail.

What is IPO

IPO (Initial Public Offering) is initial public offering of the company (emission). It means that the company for the first time puts the events on the market that investors, originally with it not connected could purchase them in any way. After an output on the exchange the status of the company — from private (that is whose shares anyone cannot take — for this purpose the buyer needs to sign only the agreement with broker company, it is possible to work at the Moscow exchange through ITinvest) changes, it becomes public, and its shares are freely traded at the exchange and can be purchased by anyone.

Why it is necessary

There are several basic reasons on which the company can aim to become public. Among them:

  • Maximizing cost of shares of shareholders — if the manual of the company is confident in its good perspectives in the market, then the output on IPO can be more profitable to shareholders, than sale of business of other company. The stock price after start of auction can grow, also the cost of shares in the company of its initial shareholders respectively will increase.
  • Fund raising on more profitable conditions — IPO allows management to attract large sums of money, than they could receive from private investors, and the general assessment of business at the same time is higher. A business assessment in case of the company which is freely traded at the exchange it is normal above because any can take its shares that not so in case of the private company — liquidity of publicly traded events is higher, the investor can always sell or purchase them still.
  • Receipt of the tool for payment of the absorbed companies — quite often the companies grow due to purchase of competitors and interesting, but smaller, the companies — such approach, for example, is widespread among the technology companies in the USA. Google and Facebook buy every year all new startups. And as a rule, one of payment methods at absorption, is not only money, but also events of the "parent" company. For example, when Facebook bought the WhatsApp messenger for $19 billion, money paid only about $4 billion, and the rest was made by events. Events of the private companies are not so valuable to founders of the absorbed projects as they will not be able easily to sell them. The same plus belongs and to I will just engage the qualified employees — they can offer as compensation not only money, but also events.
  • Recognition increase — the fact remains, an output on IPO is a big event which draws media exposure and the public. It is not always possible to achieve similar attention by normal methods of marketing and PR. Besides, hit in listing of the largest world exchanges, like NYSE, Nasdaq or LSE — it is simply prestigious.

Besides, for early investors of the company and some of her founders, carrying out IPO can be good "strategy of an output" (exit strategy) — by means of attraction of finance at the exchange they cover the initial attachments and earn.

Openness problems

But not everything is so smooth, and receipts of the status of the public company are involved also by a number of difficulties. One of main — need of disclosure of information on activity of the company. The public companies are obliged to publish periodically financial statements which show success or not success of its activity and can seriously influence the price of the events traded at the exchange.

To conform to various requirements of regulators and to successfully pass regular audits, the companies need to make serious efforts, costs for which can be too essential to not the largest business.

Besides, expectations of the public and shareholders who are interested in growth of a stock value can lay down a heavy load on shoulders of management of the company. It can lead to the fact that heads will begin to work on achievement of short-term objectives, but not on a solution of the tasks promoting long-term growth.

As IPO prepares

Process of preparation for IPO — difficult business which takes from several months to one year and costs the company of serious means. It is quite difficult to organize process independently to business therefore there is a need for hiring of investment bank (or several banks) which will be engaged in a podgtovka. Such banks are called underwriters of IPO.

After the choice of bank representatives of financial institution and the manual of the company agree about parameters of future placement: to a stock price which will be let out in free circulation, their type, total amount of means which are going to be involved.

Following the results of negotiations the agreement is signed. After that the underwriter transfers the investment memorandum to regulator of the country on which exchange site placement of shares will be performed. In the USA it is the commission on securities (SEC), and in our country — the Bank of Russia. This memorandum contains detailed information on the sentence and the company — the financial reporting, biographies of the manual, the existing legal problems of the organization, the list of the current shareholders and the purpose of attraction of financing. After that the provided data are checked, additional information is in case of need requested. If everything is correct, then date of IPO is assigned.

To whom carrying out IPO is still profitable

Underwriters not only prepare IPO, but also are one of the first players who receive benefit from all this process. They make own investments in placement preparation, in exchange having an opportunity "to take" shares of the company still until as they will officially get to listing of the exchange. At the same time the price at which shares are taken by the underwriter under the terms of the agreement with the company usually below than the final price set for IPO — and earns bank from this difference. Therefore in case of the perspective company, the competition among potential underwriters for the right to carry out its placement, can be extremely serious.

To maximize the profit, banks underwriters are also put in promotion of the forthcoming placement — for this purpose, including, special road show during which information on the companies is provided to large and perspective investors, sometimes from the different countries will be organized. It also suggest to take shares even prior to auction (allocation). For example, here such cities to management of the Russian companies aiming on IPO are advised to visit with road show experts of the Moscow exchange:

Why the companies carry out IPO: Pluses and minuses

Carrying out to IPO and the exchanges is profitable — placement of the large and perspective companies allows to increase overall liquidity and a trading volume, so, to earn more from the commission. Therefore among exchange platforms there is also a serious competition for perspective IPO — representatives of platforms address management of the companies, explaining pluses of placement of shares at them.

Where the Russian companies carry out IPO

The largest Russian exchange is Moscow, and the companies from our country carry periodically out own placements there. Placements at the Moscow exchange carry out the companies of the different industries — for example, carried out "Yandex").

At the same time there is a possibility of carrying out placement with the so-called "international component" — in this case the company organizes placement not only at the Moscow exchange, but also offers events on a foreign site. Legal aspects of carrying out IPO at the Moscow exchange are presented in this document.

In 2012 the Moscow exchange published the statistics prepared by analysts Sberbank CIB illustrating geographical structure of investors in IPO of the Russian companies:

Why the companies carry out IPO: Pluses and minuses

At the same time the most part of placements of shares of the Russian companies nevertheless happens abroad. According to the analytical company PWC, during the period from 2005 to 2014, the Russian companies carried out 117 IPO, at the same time only 37 of them fell on the Moscow exchange. Most of all primary placements (67) it was performed at the London exchange (LSE), approximately identical interest of the Russian companies during this period was caused by the Nasdaq, Deutsche Börse, NYSE and Hong Kong Stock Exchange exchanges:

Why the companies carry out IPO: Pluses and minuses


IPO is a working tool which allows the companies to attract money to serious development on more profitable conditions, than private investors could offer. However placement of shares at the exchange bears in itself not only pluses, but also minuses, not only positive PR gives, but also can become the reason of emergence of waves of criticism if the stock price as a result falls lower than the level of start of auction.

The last point is often called the reason that in the USA the technology companies became more rare to come to IPO (number of such placements now at the bottom level since 2008) — the manual of such organizations frightens off experience of predecessors who with a big pump carried out IPO, and then their events did not show during trading good results.

As a result, heads of many companies prefer to remain in a private format and not to become public, writes the The Wall Street Journal edition. And to initial investors of the companies can be more profitable to find the buyer in such conditions independently, but not to open sale for anyone.

All cases are unique, and often happens so that it is more profitable to company "to be on sale" larger organization to benefit by a synergy with it, but not to remain independent and to try to develop by means of the money attracted by means of IPO. The first way was selected as a result by already mentioned founders of WhatsApp who preferred to sell business of Facebook for $19 billion, but not to come to IPO.

The picture on a teaser: Getty images

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