Initial public offerings--going public

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Table of Contents Executive Summary ................................................................................................................................ 3

Brief Introduction .................................................................................................................................... 4

Research Description and Objectives ..................................................................................................... 5

Facebook as an IPO case study ............................................................................................................... 7

Recommendations ................................................................................................................................... 8

Reference ................................................................................................................................................ 9

Executive Summary

Every firm wants to have its growth of the business in the international market and also want

to collect huge fund so that the firm can expand its business. Also every firm want to attract

the customers and best talent to the industry and want to have the competitive advantage.

Initial public offering is the only solution for it and it shows that potential for the business in

the market and future growth. It is also a reward to the founders and the investors who made

the business through hard work.

Brief Introduction

An initial public offering, generally described as IPO or stock market launch as first sale of

the financial stock of the company to the public people. IPO is a type of public offering

through which the fund is accumulated from the public for the future use of the company.

Because of the Initial public offering the company which is now a private firm turns in to the

public company. The initial public offering by the firm is done in order to raise expansion

capital and it becomes publically traded company in the stock market. The firms who turns in

to public from the private takes help from the investment banking to handle the asset and

liabilities of the firm so that the investment and financial activities can be assess correctly,

and also the value of share, and share price of the public firm (Goergen, M.; Khurshed, A.;

Mudambi, R. 2007, 401–419).

The IPO process requires long term planning and execution with the best market

environment. Going public is a very typical transformational process that need to focus on

different business segments for the common goal. When a firm lists itself to the public

exchange, the fund or money invested by the investors to the company directly goes to the

firm account based on the condition of the later shared trade of the company by the investors.

It is a equity for the firm in terms of sale of shares of common stock. IPO thus allows to the

concern company to tap a wide pool of the investors to provide the capital by the investors

for the firm’s future growth, working capital or repayment of the liabilities of the firm

(Khurshed, A.; Mudambi, R., 2002, pp. 697–706).

Initial Public offering has the best use of it as to have the immediate impact on the earnings

and it provides the increase in sales because of the increase in inventory of the firm or

through accounts receivables. For example, the case of Facebook as latest biggest IPO in the

world is the best example of the Initial public offering. Facebook sold 421,233,615 shares for

the price of USD $38 and collected the biggest amount from the public in social networking

industry. This report analyse the different aspects of the IPO for a firm that turn from private

in to public.

Research Description and Objectives

Initial public offering is considered as the positive sign of the firm’s success. Going public

for the number of firm is not just selling stock but it is more than that and it is an indicator for

the firm that firm has made the business. Going public means that a firm is now owned by

one or number of individuals where the business is changed to as the owner of the number of

people. Initial public offering doesn’t only allow the firm to give access to the capital for its

fuel growth but as liquidity for the founders and investors (Chen. H. and J. Ritter, 1998). The

capital raise through the successful initial public offering boosts the business and gives the

ability to expand the business in to the new market and grows through the acquisitions and

also help the firm to attract the new talent with the stock options and equity, it rewards the

initial investors with liquidity. Initial public offering; involve one or many other investment

banking that is known as underwritings.

While selling the shares, the underwriting takes some commission based on the total

percentage of the value of the shares. It has been developed an auction process for the issue

of the shares in order to minimize the extreme under pricing. There are few objectives in

order to go public of the private firms. Initial public offering, gives the higher valuation for

the public company and the higher liquidity to the public markets, the access for the capital of

the firm is greater. According to Rowe, it may happen that the initial public offering might be

costly and may be of time consuming but the thing that need to analyse before going public is

the market demand and the influence of the business to the market. It depends on the efficient

and quick stock issuer (Ellis, K, R. Michaely, and M. O’Hara, 1999) . It is stated in the earlier

researches that Initial public offering is considered as the risky investment option.

In case of the individual investor it is very difficult to understand about the stock for the

initial days of offering of the trading. In the near future there is need to analyse the historical

data of the company. Most of the initial public offer goes through the transitory growth

period those are uncertain for its future value. It goes for public from private in order to

increase the liquidity so that it can help a firm to attract the top talent because of enabling the

stock options or might be because of restricted stock awards. It doesn’t only attract the top

talent but also attracts the number of other opportunities for the people. Other aspects of this

is to offer a business with the currency through which it acquire the other business too and

also go for the valuation of the entire business in the acquisition target market (Michaely, R.

and K. Womack, 1998).

IPO for acquiring the liquid on the proposed investment is a way of founders or employees or

for the other persons as a financial reward because it takes a hard work to build a strong and

big business. IPO also does an great act for the marketing propose for the firm as it increase

the sales by 400 percent and increase the interest in the products and services. A milestone

for any company is the issuance of publicly traded stock. There are number of steps which

take the company to go for public as strategic decision for the firm, as growth through

acquisitions and cash to attract the customers and investors and direct access to the capital

market. Second step is to find the investment banker, third step is selling the underwriter and

final step is common deal breakers. The main objective of the initial public offering is to

make presence in the market globally and collects the fund for the growth and acquisitions in

the market and has competitive advantage in the similar market industry (Ellis, K, R.

Michaely, and M. O’Hara, 1999)

In the public offering there is no final offering price as it depends on the market price and the

environment, and the business strength of the firm. Therefore, the equity in sharing, and total

share depends on these conditions also the interest of the customer defines the success of the

firm. The securities act of 1933 states that the company and its counsel draft a registration

statement of filing with SEC. The only aim as a Broadway is to gain the market attention

towards the business and expand the business globally (Ritter, J., 1991, pp. 3-27)

.

Facebook as an IPO case study

The best example of the public Initial offering in the history of the social networking industry

is the Initial public offering of Facebook that occurred in the year 2012. Facebook filed the

IPO to raise USD $ 5 billion and its value is USD $ 100 billion which made the Facebook

four times bigger than the value of Google. Facebook took a long time to issues the initial

public offering this year. It was listed in NASDAQ and it offered 421,233,615 shares in the

market. The ownership of Facebook before IPO was USD $ 66 billion but after IPO the value

of the Facebook ownership increased by USD $ 72.7 billion (.BBC News. May 16, 2012)

In this IPO for the value of USD $ 5.4 billion share was sold by the existing shareholders and

USD $ 6.1 billion share was sold by Facebook. The latest results for the Initial public offering

for Facebook examines that after a month of the announcement of the Initial public offer the

market got collapse and the value of each share got reduce by USD $ 38 to a lower value this

shows the future market of the Facebook in the international capital market. The current

situation of the Facebook users is now seem to be saturated and also the IPO will be in the

saturated situation after some time.

Recommendations

It is recommended that the IPO must need to be issue when it seems the firm to be in a great

going and have the potential customers on its way. IPO increases the saes of the firm and

creates a good brand among the customers so it is highly recommended for the firm to go for

IPO after a good interval of growth for the company.

Reference 1. Goergen, M.; Khurshed, A.; Mudambi, R. (2007). "The Long-run Performance of UK

IPOs: Can it be Predicted?". Managerial Finance 33 (6): 401–419

2. Khurshed, A.; Mudambi, R. (2002). "The Short Run Price Performance of Investment

Trust IPOs on the UK Main Market". Applied Financial Economics 12 (10): 697–706

3. Aggarwal, R., 1998, “Stabilization Activities by Underwriters after New Offerings,”

Working Paper, Georgetown University.

4. Chen. H. and J. Ritter, 1998, “The seven percent solution,” Working Paper,

University of Florida, Gainesville, FL.

5. Ellis, K, R. Michaely, and M. O’Hara, 1999a, “When the underwriter is the market

maker: An examination of trading in the IPO Aftermarket,” Working Paper, Cornell

University, Ithaca NY.

6. Ellis, K, R. Michaely, and M. O’Hara, 1999b, “The market microstructure of IPOs”,

Work in progress, Cornell University, Ithaca NY.

7. Michaely, R. and K. Womack, 1998, “Conflict of interest and the credibility of

underwriter Working Paper, Cornell University, Ithaca NY.

8. Ritter, J., 1991, "The Long-Run Performance of Initial Public Offerings," Journal of

Finance 46, 3-27.

9. Facebook boosts number of shares on offer by 25%". BBC News. May 16, 2012.