IPO
Outline of IPO Process
1. Select underwriter 2. Register IPO with SEC 3. Print prospectus 4. Present roadshow 5. Price the securities 6. Sell the securities
Average IPO returns
96'-23% 98'-37% 99'-276% 00'-(-7%)
Price the securities
Based on the priced based on the value of the company and expected demand for the securities Examples of valuation methods: -net present value -earnings/price ratios
Google's attempt to stay private
Eric Schmidt: "we're generating cash. We don't ever need to go public" -didn't want to become a short sighted company
Disadvantages of IPO
Expensive-a firm may spend about 15-20% of money raised on direct expenses Reporting responsibilities-public companies must continuously file reports with the SEC and the stock exchange they list on Loss of Control-ownership is transferred to outsiders who can take control and even fire the entrepreneur
Types of underwriting
Firm commitment underwriting: -the underwriter buys the entire issue, assuming full financial responsibility for any unsold shares -most prevalent type of underwriting in US Best efforts: -they sell as much of the issue as possible, but can return any unsold shares to the issuer without financial responsibility
Why IPO?
New Capital (need money to expand) Future Capital Mergers and acquisitions
Google going public
Reports valued IPO at $16 billion estimated 2003 revenue: $1 billion, profit: $300 million
Print prospectus
a legal document desribing details of issuing corporation and proposed offering to investors -contains much of the info in registration statement -preliminary prospectus is called a "red herring"
Sell the securities
full fledged selling final prospectus must accompany the delivery of securities
Best underwriters
goldman sachs morgan stanley merrill lynch
Select an underwriter
investment firm that acts as an intermediary between a company selling securities and the investing public -they're the principle player in the IPO -they buy the securities for less than the offering price and accepts the risk of not being able to sell them
Register IPO
registration statement and file with SEC discloses all material information concerning the corporation making a public offering
Present road-show
road-show is presented to institutional investors around the country -allows firms to raise interest in the company and thus the price -allows the firm and its underwriters to gather information from potential investors
Is there a good time to do an IPO
there are clear "windows of opportunity" that open and close for IPO issuers Determinants of suitability: -general stock market condition -low unemployment, inflation, interest rates -frequency and size of all IP's in the financial cycle -during a bull market