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)