Page 1 of 5
Journal for Studies in Management and Planning
Available at
http://edupediapublications.org/journals/index.php/JSMaP/
ISSN: 2395-0463
Volume 03 Issue 11
October 2017
Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 318
A Study on Analysing the Position of Initial Public
Offer
Mallela Jangaiah, MBA
Department of management (finance)-JNTUH
Abstract:
Initial public offering (IPO) or stock market
launch is a type of public offering in which
shares of a company usually are sold to
institutional investors that in turn, sell to the
general public, on a securities exchange, for
the first time. Through this process, a
privately held company transforms into a
public company. Initial public offerings are
mostly used by companies to raise the
expansion of capital, possibly to monetize
the investments of early private investors,
and to become publicly traded enterprises. A
company selling shares is never required to
repay the capital to its public investors.
After the IPO, when shares trade freely in
the open market, money passes between
public investors. Although IPO offers many
advantages, there are also significant
disadvantages, chief among these are the
costs associated with the process and the
requirement to disclose certain information
that could prove helpful to competitors. The
IPO process is colloquially known as going
public.
Key words: Financial Markets and functions, financial Policy, IPO History, IPO Policy...
Introduction
: Initial public offering (IPO), also referred to
simply as a "public offering" or "flotation," is
when a company issues common stock or shares
to the public for the first time. They are often
issued by smaller, younger companies seeking
capital to expand, but can also be done by large
privately-owned companies looking to become
publicly traded.
In an IPO the issuer may obtain the assistance
of an underwriting firm, which helps it
determine what type of security to issue
(common or preferred), best offering price and
time to bring it to market.
An IPO can be a risky investment. For the individual
investor, it is tough to predict what the stock or
shares will do on its initial day of trading and in the
near future since there is often little historical data
with which to analyze the company. Also, most IPOs
are of companies going through a transitory growth
period, and they are therefore subject to additional
uncertainty regarding their future value.
However, in order to make money,
calculated risks need to be taken. Initial public
offering (IPO) or stock market launch is a type of
public offering in which shares of a company usually
are sold to institutional investors[1] that in turn, sell to
the general public, on a securities exchange, for the
first time. Through this process, a private company
transforms into a public company.
Initial public offerings are mostly used by
companies to raise the expansion of capital, possibly
to monetize the investments of early private
investors, and to become publicly traded enterprises.
A company selling shares is never required to repay
the capital to its public investors. After the IPO, when
shares trade freely in the open market, money passes
between public investors. Although IPO offers many
advantages, there are also significant disadvantages,
chief among these are the costs associated with the
process and the requirement to disclose certain
information that could prove helpful to competitors.
The IPO process is colloquially known as going
public.
Details of the proposed offering are
disclosed to potential purchasers in the form of a
lengthy document known as a prospectus. Most
companies undertake an IPO with the assistance of an
investment banking firm acting in the capacity of an
Page 2 of 5
Journal for Studies in Management and Planning
Available at
http://edupediapublications.org/journals/index.php/JSMaP/
ISSN: 2395-0463
Volume 03 Issue 11
October 2017
Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 319
underwriter. Underwriters provide several services,
including help with correctly assessing the value of
shares (share price) and establishing a public market
for shares (initial sale).
Alternative methods such as the dutch
auction have also been explored. In terms of size and
public participation, the most notable example of this
method is the Google IPO.
[2] China has recently
emerged as a major IPO market, with several of the
largest IPOs taking place in that country
History:
The earliest form of a company which issued public
shares was the publican during the Roman Republic.
Like modern joint-stock companies, the publican
were legal bodies independent of their members
whose ownership was divided into shares, or parties.
There is evidence that these shares were sold to
public investors and traded in a type of over-the- counter market in the Forum, near the Temple of
Castor and Pollux. The shares fluctuated in value,
encouraging the activity of speculators, or quaestors.
Mere evidence remains of the prices for which partes
were sold, the nature of initial public offerings, or a
description of stock market behavior. Publicanis lost
favor with the fall of the Republic and the rise of the
Empire.
The first modern IPO occurred in March 1602 when
the Dutch East India Company offered shares of the
company to the public in order to raise capital. All
the shares were tradable, and the shareholders
received receipts for the purchase. A share certificate
documenting payment and ownership such as we
know today was not issued but ownership was
instead entered in the company's share register. In the
United States, the first IPO was the public offering of
Bank of North America around 1783.
When a company lists its securities on a public
exchange, the money paid by the investing public for
the newly issued shares goes directly to the company
(primary offering) as well as to any early private
investors who opt to sell all or a portion of their
holdings (secondary offering) as part of the larger
IPO. An IPO, therefore, allows a company to tap into
a wide pool of potential investors to provide itself
with capital for future growth, repayment of debt, or
working capital. A company selling common shares
is never required to repay the capital to its public
investors. Those investors must endure the
unpredictable nature of the open market to price and
trade their shares. After the IPO, when shares trade
freely in the open market, money passes between
public investors. For early private investors who
choose to sell shares as part of the IPO process, the
IPO represents an opportunity to monetize their
investment. After the IPO, once shares trade in the
open market, investors holding large blocks of shares
can either sell those shares piecemeal in the open
market, or sell a large block of shares directly to the
public, at a fixed price, through a secondary market
offering. This type of offering is not dilutive, since no
new shares are being created.
Once a company is listed, it is able to issue additional
common shares in a number of different ways, one of
which is the follow-on offering. This method
provides capital for various corporate purposes
through the issuance of equity (see stock dilution)
without incurring any debt. This ability to quickly
raise potentially large amounts of capital from the
marketplace is a key reason many companies seek to
go public.
An IPO accords several benefits to the previously
private company:
Enlarging and diversifying equity base
Enabling cheaper access to capital
Increasing exposure, prestige, and public
image
Attracting and retaining better management
and employees through liquid equity
participation
Facilitating acquisitions (potentially in
return for shares of stock)
Creating multiple financing opportunities:
equity, convertible debt, cheaper bank loans,
etc.
There are several disadvantages to completing an
initial public offering:
Significant legal, accounting and marketing
costs, many of which are ongoing
Requirement to disclose financial and
business information
Meaningful time, effort and attention
required of management
Risk that required funding will not be raised
Public dissemination of information which
may be useful to competitors, suppliers and
customers.
Loss of control and stronger agency
problems due to new shareholders
Increased risk of litigation, including private
securities class actions and shareholder
derivative actions[6]
The Final step in preparing and filing the final IPO
prospectus is for the issuer to retain one of the major
financial "printers", who print (and today, also
electronically file with the SEC) the registration
statement on Form S-1. Typically, preparation of the
final prospectus is actually performed at the printer,
where in one of their multiple conference rooms the
issuer, issuer's counsel (attorneys), underwriter's
Page 3 of 5
Journal for Studies in Management and Planning
Available at
http://edupediapublications.org/journals/index.php/JSMaP/
ISSN: 2395-0463
Volume 03 Issue 11
October 2017
Available online: http://edupediapublications.org/journals/index.php/JSMaP/ P a g e | 320
counsel (attorneys), the lead underwriter(s), and the
issuer's accountants/auditors make final edits and
proofreading, concluding with the filing of the final
prospectus by the financial printer with the Securities
and Exchange Commission.[15]
Before legal actions initiated by New York Attorney
General Eliot Spitzer, which later became known as
the Global Settlement enforcement agreement, some
large investment firms had initiated favorable
research coverage of companies in an effort to aid
corporate finance departments and retail divisions
engaged in the marketing of new issues. The central
issue in that enforcement agreement had been judged
in court previously. It involved the conflict of interest
between the investment banking and analysis
departments of ten of the largest investment firms in
the United States. The investment firms involved in
the settlement had all engaged in actions and
practices that had allowed the inappropriate influence
of their research analysts by their investment bankers
seeking lucrative fees.[16] A typical violation
addressed by the settlement was the case of CSFB
and Salomon Smith Barney, which were alleged to
have engaged in inappropriate spinning of "hot" IPOs
and issued fraudulent research reports in violation of
various sections within the Securities Exchange Act
of 1934.
Pricing
A company planning an IPO typically appoints a lead
manager, known as a bookrunner, to help it arrive at
an appropriate price at which the shares should be
issued. There are two primary ways in which the
price of an IPO can be determined. Either the
company, with the help of its lead managers, fixes a
price ("fixed price method"), or the price can be
determined through analysis of confidential investor
demand data compiled by the bookrunner ("book
building").Historically, many IPOs have been
underpriced. The effect of underpricing an IPO is to
generate additional interest in the stock when it first
becomes publicly traded. Flipping, or quickly selling
shares for a profit, can lead to significant gains for
investors who were allocated shares of the IPO at the
offering price. However, underpricing an IPO results
in lost potential capital for the issuer. One extreme
example is theglobe.com IPO which helped fuel the
IPO "mania" of the late 1990s internet era.
Underwritten by Bear Stearns on November 13,
1998, the IPO was priced at $9 per share. The share
price quickly increased 1000% on the opening day of
trading, to a high of $97. Selling pressure from
institutional flipping eventually drove the stock back
down, and it closed the day at $63. Although the
company did raise about $30 million from the
offering, it is estimated that with the level of demand
for the offering and the volume of trading that took
place they might have left upwards of $200 million
on the table.
The danger of overpricing is also an important
consideration. If a stock is offered to the public at a
higher price than the market will pay, the
underwriters may have trouble meeting their
commitments to sell shares. Even if they sell all of
the issued shares, the stock may fall in value on the
first day of trading. If so, the stock may lose its
marketability and hence even more of its value. This
could result in losses for investors, many of whom
being the most favored clients of the underwriters.
Perhaps the best known example of this is the
Facebook IPO in 2012.
Underwriters, therefore, take many factors into
consideration when pricing an IPO, and attempt to
reach an offering price that is low enough to
stimulate interest in the stock, but high enough to
raise an adequate amount of capital for the company.
When pricing an IPO, underwriters use a variety of
key performance indicators and non-GAAP
measures.[17] The process of determining an optimal
price usually involves the underwriters ("syndicate")
arranging share purchase commitments from leading
institutional investors.
Some researchers (Friesen & Swift, 2009) believe
that the underpricing of IPOs is less a deliberate act
on the part of issuers and/or underwriters, and more
the result of an over-reaction on the part of investors
(Friesen & Swift, 2009). One potential method for
determining underpricing is through the use of IPO
underpricing algorithms.
Dutch auction
A Dutch auction allows shares of an initial public
offering to be allocated based only on price
aggressiveness, with all successful bidders paying the
same price per share.[18][19] One version of the Dutch
auction is OpenIPO, which is based on an auction
system designed by Nobel Memorial Prize-winning
economist William Vickrey. This auction method
ranks bids from highest to lowest, then accepts the
highest bids that allow all shares to be sold, with all
winning bidders paying the same price. It is similar to
the model used to auction Treasury bills, notes, and
bonds since the 1990s. Before this, Treasury bills
were auctioned through a discriminatory or pay- what-you-bid auction, in which the various winning
bidders each paid the price (or yield) they bid, and
thus the various winning bidders did not all pay the
same price. Both discriminatory and uniform price or
"Dutch" auctions have been used for IPOs in many
countries, although only uniform price auctions have
been used so far in the US. Large IPO auctions
