Initial Public Offerings Case Study

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Initial Public Offerings Initial public offerings (IPO) are when an offering of stock in a private company is made to the public for the first time. Most IPO’s are made to raise money for the private company (Grabianowski, 2015). A finance manager should understand if an IPO investment if right for the company in their investment portfolio. Prior to buying shares, a finance manager should be able to evaluate the following pertaining to an IPO:
1. How the investment could help meet the investment objective of the company along with the overall investment strategy.
2. How the IPO entity makes money.
3. What are its key products and/or service of the entity.
4. The potential risks/rewards of the investment in the entity.
(US News & Money,
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It truly depends on the expected growth of the company in relation to their capital requirements. It can range from being starved for capital with approaching growth opportunities to a more mature company with substantial cash flow needing additional funds in which to invest in certain projects (Poulsen & Stegemoller, 2008). With an IPO, the private company sells a portion of its outstanding equity yet retains a significant portion with the original investment owners and therefore maintains control of the entity. Public ownership has its advantages and disadvantages to the original owners and the reasons for choosing public ownership vary widely between companies.
Companies that decide to issue an IPO tend to be high growth companies that want access to the public equity markets without incurring debt funding. “Initial public offerings of securities are among the most important events in capital markets. By providing access to public markets, the IPO is both the conduit for new capital to flow to fledgling companies, and the mechanism for the existing owners to realize a return for their efforts” (Ellis, 2000, pg. 27). The main four advantages to issuing an IPO are to:
1. Raise funds - Owners will have access to public debt and equity markets and it is easier to raise capital through the public sale of shares even after the initial
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Managers must understand the costs associated with an IPO including the requirements imposed by the government and investors. The costs of an IPO include the initial filing and registration of the prospectus with the Securities and Exchange Commission (SEC), continued disclosures mandated by the SEC, investment banking fees, the underwriting costs, and the initial underpricing in the initial equity sale (Poulsen et al, 2008). Internal control processes, additional financial reporting, and corporate culture and management all have costs to the organization that must be evaluated before undertaking on an IPO issue. Outside investors now have a say in the management of the company and not every decision will be made internally. Unfortunately, not all “owners” agree on every decision that the company

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