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Vade Mecum - IPO

This document provides an overview of the initial public offering (IPO) process. It explains that companies are private with few shareholders prior to an IPO, but become public companies with many shareholders and strict regulations after going public. The main reasons for a company to pursue an IPO are to obtain cheaper debt, gain prestige, issue more stock if there is demand, and provide liquidity through trading on open markets. The process involves underwriters raising money through equity, negotiating a deal with the company, filing paperwork with regulators, marketing the offering to investors, setting a price, and selling stock. Small investors may find it difficult to participate. Factors for potential investors to consider include management goals, underwriter reputation, research on the

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96 views2 pages

Vade Mecum - IPO

This document provides an overview of the initial public offering (IPO) process. It explains that companies are private with few shareholders prior to an IPO, but become public companies with many shareholders and strict regulations after going public. The main reasons for a company to pursue an IPO are to obtain cheaper debt, gain prestige, issue more stock if there is demand, and provide liquidity through trading on open markets. The process involves underwriters raising money through equity, negotiating a deal with the company, filing paperwork with regulators, marketing the offering to investors, setting a price, and selling stock. Small investors may find it difficult to participate. Factors for potential investors to consider include management goals, underwriter reputation, research on the

Uploaded by

api-3823374
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© Attribution Non-Commercial (BY-NC)
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Vade mecum – IPO

 IPO – first sale of stock by company to the public


 Companies
 Private – few shareholders and not so strict in terms of disclosure of information
 Public – large number of shareholders and very strict regulations
 Why go Public?
 Easier to obtain cheaper debt
 Prestige
 If demand exists then issue more
 Trading in open markets means liquidity
 The Process
 Underwriting – raising money through debt or equity (in this case equity)
 Middlemen between issuers and public
 Company & Investment Bank negotiate deal
• Firm Commitment – IB guarantees that a certain amount will be sold by buying
the entire offer and then reselling to the public; responsible for unsold inventory
• Best Efforts agreement – underwriter sells securities but does not guarantee the
amount raised
 Deal agrees then sent to SEC with all relevant financial info
 “Cooling off period”
• SEC evaluates
• Underwriter puts together Red Herring - initial prospectus (w/o offer price and
effective date
• With Red Herring – Underwriter and Company put up a “Dog and Pony Show”
to court institutional investors
• Offering Circular – abbreviated prospectus given to individuals and brokerages
to generate interest abt the IPO
• Price arrived at
• Stock sold to investors

Epili Sagar ©
Vade mecum – IPO
• Tombstone – a written advertisement placed by investment bankers giving basic
details of the issue
 IPO - hard for small investors to get their hands on
 Things to Consider
 No History – scrutinise Red Herring
 Management goals for use of IPO money
 Underwriters? Big or small?
 Research asa possible on company
 Lock-up period – a time period specified by underwriter till which insiders of company
cannot sell their stocks. But asa they can, they all sell to realise profits and it puts a
downward pressure on price.
 Flipping – IPO stock is sold in early days to earn quick profit
 Discouraged since company looking for LT investors
 PTN – be wary of buying IPO shares in early days because price will see sharp fall
once institutions book profits.
 Avoid Hype – buy if you consider it a good investment; not just because it is an IPO
 Other Terms
 Eating Stock – when underwriter is forced to buy stock if it is unable to sell the IPO
 Greenshoe Option – whereby underwriter is allowed to sell more stock than originally
intended because the supply increases to meet the demand and prevents wild price
fluctuations
 Greensheet – summary of prospectus outlining both GOOD and BAD points of the IPO
for the insiders of an underwriting firm.

Epili Sagar ©

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