An IPO ( Initial Public Offering ) is the first sale of stock by a private company to the public. IPOs are often issued by smaller, younger companies seeking the capital to expand, but can also be done by large privately-owned companies looking to become publicly traded. In an IPO, the issuer obtains the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), the best offering price and the time to bring it to market.
When a private company decides to undertake the processes involved with Initial Public Offerings it does so with an over-arching reason, to attract growth capital. Not only will the sources of available capital be much greater than what’s presented to private companies, but prove to be the very best type of financing, since equity capital doesn’t ever need to be repaid.
The most favorable aspects of an IPO are:
- Greater access to more sources of capital
- Cheaper cost of acquiring growth and expansion capital
- The use of stock options to attract and retain company officers and key personnel
- The public image of the company is enhanced with greater prestige
- The company stock can be used for Mergers and Acquisitions
- Provides an exit strategy for the early investors
Before deciding whether or not to go public, companies must evaluate all of the potential advantages and disadvantages that will arise. This will usually happen during the underwriting process, as the company works with an investment bank to weigh the pros and cons of a public offering, and determine if it is in the best interest of the company.
