Initial Public Offerings (IPOs)

in general, the highest valuations and most liquidity is provided by a _____.

IPO

what is required for an IPO to work successfully?

a good track record, significant market share, and high prospects for growth (minimum amount of 5,000,000)

state 2 decisions in the IPO process

deciding the amount of capital to be raised, offering price for shares, and the underwriter fee structure

stage 1 decisions in the IPO process

determine amount of capital to be raised, choosing an investment banker, analyzing same-size firms that have successfully implemented IPO strategy, choose lawyers and accountants

underwriting syndicate

group of investment banking firms formed to spread the risk of investment banker purchase and distribution obligations

advantages to IPOs

improves debt/equity ratio, provides ability to raise future capital, provides ability to make strategic acquisitions

issuance costs

investment banker fee, lawyer fee, accountant fees, printing costs

maintenance of secondary market

investment banker makes sure the market is liquid for selling that stock

best efforts issue

issue in which investment banker agrees to use best efforts to sell the issue at the best price they can get in the IPO - issuing company is at high risk bc they may not get all the cash they need

underwritten issue

issue in which the investment banker agrees to buy the entire issue at the offering price - guarantees the entire issue will be sold and accepts potential for failure. issuing company is assured they will get the cash they need

registration statement

provides financial, legal, and technical information about the company and the security issue (must be filed with the SEC)

intangible costs for IPOs

serious drain on managements time and attention

prospectus

summarizes the information in the registration statement, provided to prospective investors (must be filed with SEC)