Initial Public Offering (IPO) and Benefits
According to Warren Fees in his book "Accounting," there are a number of factors that ultimately control the pricing of an Initial Public Offering (IPO). The stock of a corporation that intends to go public is often issued at a price other than its par value. This is because the par value the stock represents an almost arbitrary value. The actual market price at which stock can be sold by a corporation depends on a variety of factors. According to Fees, some of the more important factors include the financial condition of the company at the time of the IPO, as well as its earnings record. Also, if the company considering an IPO has a history of paying dividends to stockholders as a privately held company, its dividend record will be of interest to potential investors in the IPO.Another factor that will be considered when determining the stock price in an IPO involves investors' expectations about the corporation's potential earning power. More specifically, potential IPO investors will be interested in knowing what the company intends to do with the proceeds of the IPO. For example, a potential investor might be more interested in purchasing a stock in which the intended
These investors are naturally inquisitive, curious and concerned about the companies operations, profitability, plans, prospects, and accomplishments. The advantages of a privately held company going public include the following: there is increased liquidity in the shares of the company because they can now be sold on an organized stock exchange there is generally a higher share pricethere is the possibility that the company can go to the capital markets and sell additional stock to raise additional equity through additional stock offerings for continued expansionthe company considering IPO may, at a future date, be able to make acquisitions of their status is a publicly traded company by trading its stock for ownership in other corporationfollowing the IPO, the form of a privately held company may be able to use stock incentive plans to attract and retain key employeesGoing public can be part of a comprehensive retirement strategy for business owners of a privately held companyAccording to the same website, some of the disadvantages associated with going public and some of the principle reasons that a company may want remain privately held include:there is no guarantee about how much will be raised in the IPOGenerally speaking, a successful IPO requires a relatively long and stable earnings history. Second, the company considering an IPO months raise enough capital in the form of investment in the IPO to justify the time, energy, effort and expense required. More specifically, senior management will be required to deal with the company's investors as often as necessary. First, the company considering IPO must develop a story that they can share with potential investors to convince them that they IPO will be successful. com website, there are both advantages and disadvantages associated with the company deciding to go public. Senior management will be responsible for interacting with them and assuring them that their investment was appropriatethe former owners of the privately held company now share both ownership and accountability with their new investorssenior management of the new IPO has an obligation to ensure that stockholders are happy with the company's earnings as well as the dividends being declaredthere are new financial reporting requirements once a company completes an IPO including the requirement that the company follow Generally Accepted Accounting Principles, and the provisions of Sarbanes-Oxley Act, and provide information to the US Securities and Exchange Commission on a regular basis (2004). The reason or rationale is fairly simple; paying down debts does not increase shareholder value, but increasing the company's capacity to produce has the potential for generating increased revenues and additional profits. use of the IPO proceeds is to expand manufacturing operations, rather than learning that the company intends to use the proceeds of the IPO to pay down existing debts. There are also very specific reasons a firm may want to remain privately held. In other words, if potential investors view the IPO has been poorly timed in terms of changes in the broader economic outlook, they may shy away from stock in favor of some form of investment that guarantees a fixed rate of return (Fees, 2002). One of the disadvantages associated with an IPO involves the basic fact that the process of going public involves two distinct tasks. Following the IPO, the work needed to be performed by executive management increases. According to Fees, another important factor in controlling the pricing of an IPO involves the general business and economic conditions, as well as economic and business prospects. According to an essay published online by the IPO-Merge.
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