Initial Public Offerings
Initial Public Offerings (IPOs) are exciting and frightening propositions, both for those involved in managing a company as it enters an IPO and for those who choose to invest in one. A company launches an IPO when it chooses to go public as a way to raise money, which means it will be issuing stocks to the public for the first time. By selling shares of its stock, a growing company can raise capital without taking on debt. Investors, in turn, expect to earn profits by purchasing stock in a company they hope will grow, eventually making the stock worth a lot more than they paid for it.
An investment bank — Deutsche Bank, for example — usually handles the detailed process of issuing stock. A company works with the investment bank to determine how much capital is needed, the price of the stock, how much it will cost to issue such equities, and so forth. The company must file a registration statement with the SEC, which then investigates the company to ensure that it has made full disclosure in compliance with the Securities Act of 1933. The SEC then determines whether the company has met all the criteria to issue common stock and go public.
If a company has already gone public and issued stock, it can hold another primary offering during which additional new stock is issued. This is still a public offering because the stock is being sold directly to the public by the company, not among investors in the secondary markets. And while this is a public offering, it does not count as an IPO.
How to Get in on an IPO
The best way to find out about an IPO is to have a broker who is in on all breaking financial news. Investment Dealers' Digest (www.iddmagazine.com) lists all IPOs that are registered with the SEC. Once the stock is issued, the publication will print an IPO update. Companies awaiting an IPO often call the leading brokeley.vierage houses and/or brokers they are familiar with, who will inform their clients about such an offering. As is the case with anything new, these stocks can be very risky due to their potentially volatile nature. It's a good idea to wait until the stock settles before you determine whether it would be a viable investment. The vast majority of stocks that you will be researching have probably already been actively trading.
An IPO Example
In August 2004, one of the most highly anticipated IPOs in more than a decade took off with a resounding thud. The founders of Google, the Internet search engine company, took their brainchild public, using a Dutch auction system to price the company's stock in an effort to revolutionize the way Wall Street handles IPOs. This goal may have been worthwhile given Wall Street's past methods of handling IPOs (not always popular). However, Google still managed to upset both institutional and individual investors.
Before the company has its initial public offering (IPO) and its stock goes public, the SEC must make sure that everything is in order. Meanwhile, a red herring is usually issued, informing the public about the company and the impending stock offering. When the stock is ready to go public, a stock price is issued in accordance with the current market.
Individual investors who were supposed to benefit from the offering were turned off by the overly high suggested share price, which Google set at $108 to $135. (The stock ended up trading at $85.) Google's decision to issue two classes of stock also turned individual investors off. The founders got stock that gives them ten times the voting power of the hoi polloi. Google said it wanted to be democratic, but the way it structured its IPO told individual investors that management, not investors, would continue to have the primary say in how to run the company. And what of the investors who did participate, despite some dissatisfaction with the methods? They saw quick profits, as the stock hit around $200 a share within just a few weeks.
