Owners of a private company often do not take their company public for the following reasons:

– Businesses are required to reveal significant amounts of private financial and business development information, which leads to increased competition.

– “Going public” can be an expensive process with ongoing expenses in business requirements, extensive legal involvement, and larger marketing costs.

– “Going public” requires an enormous amount of time and effort by upper management to successfully complete the due diligence required, and the legal processes mandated by Federal and State regulators.

– There is always the concern that the IPO may fail to attract purchasers of the stock, and that people will not invest in the company, leading to negative perceptions difficult to counteract.

The following is a list of some of the largest IPOs in history:

– Agricultural Bank of China

– Industrial and Commercial Bank of China

– American International Assurance

– Visa Inc.

– General Motors

– Facebook, Inc.

* Notice how the top two largest IPOs in history have occurred in China. As China continues to grow, and it has not come close to reaching its potential, it is expected that larger and larger IPOs will be offered in China.

History

In 1602, the Dutch East India Company (VOC) was formed. It offered the first modern IPO, which was widely invested in by the local general public with 6,424,588 guilders raised. The VOC is considered the first multinational corporation in the world with a single share value in today’s dollars being equal to about $1500 (2012 USD).

Just like in today’s exchanges all the stock was tradable. The States-General of the Netherlands granted it a 21-year monopoly to carry out business and colonial activities in Asia. Products highly prized were spices, coffee, and tea.

Between 1602 and 1796, the VOC owned 4,785 ships and put about a million Europeans to work. During that time over 2.5 million tons of Asian trade goods were brought back to the old world. It goes without saying that the VC profited heavily from trafficking Asian spices paying annual dividends of 18 percent for almost 200 years. Unfortunately, inside corruption caused the company to fail.

The Primary Stock Offering

When a company first sells its stock on a public exchange (called a primary offering), the money paid for the stock– less commissions and exchange fees– goes to the company selling its stock. Early private investors may sell all or a portion of their stock to get cashed out of at least a part of their investment as part of the overall IPO. Stock held by officers or closely affiliated parties may be impacted by regulations which limit the amount of stock which can be sold, or when it may be tendered.

After the IPO, shares are then sold freely in the marketplace between public investors. The price falls or rises depending on what investors are willing to pay for the stock and the stock holders must depend only on the changes in the market place for their returns.

Follow-up Offerings

After the IPO is completed, and the stock is listed with an exchange, the company may elect to issue additional shares of common stock in a follow-up offering. A follow-up offering can be used to raise money without going into debt, which would need to be paid back.

The follow-up offering may dilute the amount of stock in the market place and may cause the stock to fall in value.

Procedure

Large IPOs, like last year’s Facebook offering, usually involve several investment banks, such as Morgan Stanley or Goldman Sachs, which act as “underwriter(s)”— as well as several law firms experienced in the legal aspects of IPOs.

The largest investment bank usually acts as the lead underwriter with supporting roles by smaller investment banks. The company offering its IPO through the underwriter is called the “issuer.” The issuer contracts with the underwriter to sell its shares to the public through an exchange. Terms and conditions to be established between the parties, although negotiable in theory– in actual practice– generally favor the underwriter. Significant negotiation can occur between the parties to arrive at the costs to be incurred, by whom, and the payment terms and conditions.

The method the shares are sold by IPO can vary.

For example, if your company is Facebook and you are deciding what type of sales contract with the investment banker you want to sign, you have many options. There common agreements are:

– The All-or-none contract where the underwriter agrees to sell the entire IPO or cancel the contract.

– The Best efforts contract where the underwriter agrees to sell as many shares as possible at a predetermined agreed upon price.

– The Firm commitment contract where the underwriter guarantees the sale of the IPO stock at a predetermined agreed upon price.

It is common for the underwriter to include an option in all contracts that they can increase the offering size by 15 percent. Known as a “greenshoe” or overallotment option, this option is usually exercised if the IPO is considered oversubscribed (oversold).

The overall fee charged by the underwriter is called an underwriter spread. Fees within this spread paid to others include:

– Managers fee

– Underwriting fee

– Concession

Dr. Brent Lundell owns http://www.GainStreamGroup.com, a venture capital sourcing and consulting company, and is a partner in The Guinn Consultancy Group, Inc. The Guinn Consultancy Group provides a wide array of business services, including seminars, webinars, and venture capital sourcing services. See the group website at www.theguinnconsultancygroup.com or contact them for additional information at 800-335-9269.

Dr. Brent Lundell owns http://www.GainStreamGroup.com, a venture capital sourcing and consulting company, and is a partner in The Guinn Consultancy Group, Inc. The Guinn Consultancy Group provides a wide array of business services, including seminars, webinars, and venture capital sourcing services. See the group website at www.theguinnconsultancygroup.com or contact them for additional information at 800-335-9269.

Author Bio: Dr. Brent Lundell owns http://www.GainStreamGroup.com, a venture capital sourcing and consulting company, and is a partner in The Guinn Consultancy Group, Inc. The Guinn Consultancy Group provides a wide array of business services, including seminars, webinars, and venture capital sourcing services. See the group website at www.theguinnconsultancygroup.com or contact them for additional information at 800-335-9269.

Category: Finances
Keywords: Finance,Business Funding,Venture Capital