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IPO – Initial Public Offering
In the era of high competition, the vision of a rapidly moving world today is nothing less than a combination of passion with aggression, to win every race and be on top. So IPO is a boon for people who are ready to be a leader in the future.
To know more about IPO read the article “Introduction to IPO (Initial Public Offering)” till the end.
Introduction to IPO (Initial Public Offering):
IPO stands for Initial Public Offering a private company comes out to sell shares of its stock to the public for the first time.
Therefore, an IPO will help exhilarate the growth of your startup. Just by opening up to the public to join you and share your successes and failures all together, to acquire the world with equal passion for growth.
Let’s not believe the words, just look into the figures that say the truth aloud.
In the above graphic of ‘The Economic Times, you can see the growth of the IPO in the past 15 years and constantly going up, contributing to many successful businesses till now.
Moving forward with the calculation of IPO for a better understanding of the topic in depth,
Let’s assume XYZ company, decides to go public. They plan to issue 1 million shares to the public. Before the IPO, XYZ Inc. Evaluated its estimated value for each share will be priced at $10.
Now, let us calculate the total value of the IPO:
1. Total Shares Issued: 1,000,000 shares
2. Price per Share: $10
To find the total value of the IPO:
Total Value of IPO = Total shares Issued x Price per Share
Total Value of IPO = 1,000,000 Shares x $10
Total Value of IPO = $10,000,000
So, the total value of XYZ org. IPO would be $10 million.
This is a basic example. In reality, IPO pricing can be more complex and involves factors for instance, market conditions, demand for the company’s shares, and its financial performance.
Now it’s time to discuss a few types of Initial Public Offerings which are, Fixed price and Booking Building.
Looking at each type singly will give some insight to all the knowledge seekers out there,
Fixed Price IPO:
In a fixed-price IPO, the company and its banker decide a specific price at which shares will be offered to the public. This price remains fixed throughout the IPO process, and investors know in advance exactly what they will pay per share. Here’s a simplified example:
Example: XYZ org. Fixed Price IPO
Suppose a company, XYZ Corp, decides to go public and issue shares through an IPO. The company, along with its underwriters, sets a fixed price for its shares.
Company Details:
Company Name: XYZ Corp
Total Shares to be Issued: 1,000,000 shares
Fixed Price per Share: $20
IPO Details:
XYZ Corp plans to raise capital by selling 1,000,000 shares at a fixed price of $20 per share.
Calculation:
Total Amount to be Raised: 1,000,000 shares * $20 per share = $20,000,000
So, XYZ Org. will raise $20 million from the IPO by selling 1,000,000
shares at a fixed price of $20 each.
Book Building Offerings
In contrast, book building is a method where the price of shares offered in the IPO is not fixed initially. Instead, the price range is determined based on investor demand and bids received during the IPO process. Here’s how we can calculate it:
Example of Book-Building IPO
Let’s say ABC Corp decides to go public using the book-building method.
Company Details
Company Name: ABC Corp
Total Shares to be Issued: 1,000,000 shares
Price Range: $18 to $22 per share
Book-Building Process
During the roadshows, institutional investors submit bids:
Investor A: 200,000 shares at $20
Investor B: 300,000 shares at $19
Investor C: 500,000 shares at $18.50
Investor D: 400,000 shares at $21
Demand Analysis
Total Bids Received: 1,400,000 shares
Based on the demand, the underwriters decide to set the final offer price at $20 per share, which is at the higher end of the range due to strong demand.
Pricing and Allocation
Final Offer Price: $20 per share
Shares are allocated to the investors based on their bids and the final offer price:
Subscription by Retail Investors
Retail investors can now subscribe to the IPO at the final price of $20 per share.
It’s time for us to dive into the major differences between both, fixed-price IPO:
Offers certainty to investors about the price they will pay but may not fully reflect market demand whereas Book Building Offering: Allows for price discovery based on investor demand, potentially resulting in a higher price if
demand exceeds expectations.
Choose wisely the method to calculate IPO after correctly monitoring the market conditions, investor appetite, and the company’s specific goals and circumstances.
let’s put some light on companies that become successful after opting for an IPO
Companies often achieve significant success and growth after opting for an Initial Public Offering (IPO). Going public can provide a company with the capital necessary to expand operations, invest in new projects, reduce debt, and gain a higher profile in the market. Here are some examples of companies that became successful after their IPOs:
1. Amazon (AMZN) went public in the year 1997 on May, 15 for an IPO price of $18 per share which is 1507.35 INR, the outcome of which the company raised to $54 million through IPO. Over the years, Amazon and from then there has been no going back. the company expanded from an online bookstore to a global e-commerce giant, venturing into cloud computing,
artificial intelligence, and entertainment, which resulted in massive appreciation, of their stocks, making it one of the most valuable organizations globally.
Another successful example of an IPO is Google (now Alphabet Inc., GOOGLE)
2. Google (now Alphabet Inc., GOOGL) went public on August 19, 2004, for $85 per share which is 7118.09 INR for each share. Google's IPO raised $1.67 billion. The company used the funds to accelerate its growth in search technology, advertising, and various other tech ventures. Under the Alphabet umbrella, Google has since diversified its portfolio, including projects in
autonomous driving, biotechnology, and cloud computing.
Oops! What is this Alphabet umbrella? I will explain the term to you in layman's language.
Google became a subsidiary of Alphabet, Google remains the umbrella company for Alphabet's Internet-related businesses.
Apart from Amazon And Google Facebook led in the race for success by going public
3. Facebook (now Meta Platforms, Inc., META) is also a leading face in the success story. The company went public on May 18, 2012, at $38 per share which is 3,182.17 INR. The company raised $16 billion in its IPO, marking one of the largest tech IPOs at the time. The company used the capital to enhance its platform, acquire other tech companies like Instagram and
WhatsApp, and expand its services into new areas such as virtual reality and digital payments.
What makes the company stand out from the rest?
Well, it’s their Strong Business Model, Market demand, Innovation,
Leadership and last but not least Strategic Investments.
Discussing each one of them separately for better clarity
1. Strong Business Model: Companies with a solid and scalable business model are more likely to thrive post-IPO.
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Market Demand: High demand for the company's products or services can drive revenue growth and market expansion.
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Innovation: Continuous innovation and adaptation to market trends help companies stay relevant and competitive.
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Leadership: Visionary and effective leadership can steer companies through growth phases and challenges.
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Strategic Investments: Wise use of IPO funds for acquisitions, R&D, and market expansion can lead to sustained growth.
These examples illustrate that while an IPO can provide the necessary capital for growth, the long-term success of a company depends on its ability to innovate, execute strategic plans, and adapt to market conditions.
Before we move further with the IPO, we need to shed some light on a few tips and tricks that help you go public like a pro.
10 Tips to Initiate IPO
Initiating an IPO is a complex and multifaceted process that requires meticulous planning, strategic execution, and a deep understanding of market dynamics. By educating and planning with deep research and development you can easily overcome the hurdles and achieve success smoothly.
1. Preparation and Planning
● Understand the IPO Process: Educate yourself and your team about the entire IPO process, including regulatory requirements, listing criteria, and post-IPO obligations.
● Assemble a Strong Team: Build a team of experienced professionals, including investment bankers, legal advisors, accountants, and a financial PR firm.
● Internal Audit and Compliance: Conduct a thorough internal audit to ensure your financial statements and business practices comply with regulatory standards. Address issues before proceeding.
2. Financial Readiness
● Robust Financial Records: Ensure your financial records are in top shape. This includes audited financial statements for the past few years and a clear record of revenue, expenses, and profits.
● Financial Projections: Prepare detailed financial projections that demonstrate future growth and profitability.
3. Business Optimization
● Operational Efficiency: Streamline your operations to maximize efficiency and profitability. This will make your company more
attractive to investors.
● Clear Business Model: Ensure your business model is clear, scalable, and sustainable. Investors need to understand how your company makes money and its growth potential.
4. Market Research and Timing
● Market Analysis: Conduct thorough market research to understand the demand for your industry and how your company fits into the market. Identify potential competitors and market trends.
● Optimal Timing: Choose the right time to go public. Market conditions, investor sentiment, and industry performance can
significantly impact your IPO's success.
5. Effective Communication
● Clear Messaging: Develop a compelling story about your company’s mission, vision, and growth prospects. Communicate this story consistently to all stakeholders.
● Investor Relations: Build strong relationships with potential investors. Provide them with regular updates and address their concerns transparently.
6. Valuation and Pricing
● Realistic Valuation: Work with your investment bankers to set a realistic valuation for your company. Overvaluation can lead to poor stock performance post-IPO, while undervaluation can leave money on
the table.
● Price Range: Establish a price range for your shares that reflects the company’s value and market demand. This range will be used during the book-building process.
7. Roadshow and Marketing:
● Engaging Roadshows: Conduct engaging and informative roadshows to pitch your company to institutional investors. Practice your presentation and be prepared to answer tough questions.
● Marketing Campaign: Launch a targeted marketing campaign to create awareness and generate interest in your IPO. Utilize various channels, including social media, press releases, and investor conferences.
8. Regulatory Compliance
● SEC Filings: Ensure all required documents, including the S-1 registration statements are accurately prepared and filed with the SEC (or relevant regulatory body).
● Disclosure Requirements: Adhere to all disclosure requirements to maintain transparency with investors and regulators.
9. Post-IPO Strategy
● Post-IPO Plan: Have a clear plan for how you will use the funds raised from the IPO. Communicate this plan to investors to build confidence.
● Corporate Governance: Implement strong corporate governance practices to ensure accountability and protect shareholder interests.
● Continued Communication: Maintain ongoing communication with investors and analysts. Provide regular updates on financial
performance and strategic initiatives.
10. Consider Alternatives
● Alternative Strategies: Explore alternative strategies such as direct listings or SPAC (Special Purpose Acquisition Company) mergers. Each method has its pros and cons, and one may be more suitable for your company than a traditional IPO.
Still, not all IPOs lead to success if not implemented carefully it leads to a huge failure
Here are a few notable examples of companies that faced significant challenges or failures after going public, along with the reasons behind these struggles:
1. Pets.com - Went public in the year 2000 and from that day they faced the nightmare that every company is afraid of being a failure in successfully running their business.
let’s take a glimpse at the major reasons for a company’s failure, so any entrepreneur who is looking forward to going public can learn from their mistakes.
1. Overexpansion and High Burn Rate: Pets.com expanded rapidly without establishing a sustainable business model. The company spent excessively on marketing, including a famous Super Bowl ad, which drained its resources.
2. Lack of Profitability: Pets.com struggled to achieve profitability despite high visibility. The customer acquisition cost was high, and they faced logistics and supply chain management challenges.
3. Dot-com Bubble Burst: Pets.com went public during the dot-com bubble. When the bubble burst, the market lost confidence in tech and e-commerce companies, leading to a sharp decline in stock prices and
investor interest.
There are a few more examples of companies for instance Webvan went public in the year of 1999, and the decision to opt for an IPO turned out to the the ultimate cause of their failure due to Overexpansion, High Capital Expenditure, and Poor Market Timing.
2. Webvan
Discussing all the causes in little detail will help you figure out what went wrong with the company’s downfall.
1. Overexpansion: Webvan aimed to revolutionize grocery delivery but expanded too quickly into multiple markets without fully understanding local demand and logistical challenges.
2. High Capital Expenditure: The company invested heavily in infrastructure, such as warehouses and delivery systems, without a
sustainable revenue stream to support these expenses.
3. Poor Market Timing: Similar to Pets.com, Webvan went public during the dot-com boom. The subsequent market downturn and lack of investor confidence exacerbated the company's financial struggles.
You all must have heard about the company named Groupon, have you ever wondered about their sudden vanish from India, and still running on debt?
3. Groupon
Well, the company went public in the year and this is where their struggle is, the significant reasons for their failure are, overvaluation, heavy competition, and market saturation, which made their survival impossible after going public.
The major basis of the company’s failure:
1. Overvaluation: Groupon's IPO was highly anticipated, and the company was initially valued at a high price. However, the business model faced scrutiny, and the valuation was considered unsustainable.
2. Competition and Market Saturation: Groupon faced intense competition from other daily deal sites and struggled with market saturation. Consumers and businesses began to question the long-term viability of the daily deals
model.
3. Management Issues: Groupon faced several internal issues, including management changes and controversies over accounting practices. This instability affected investor confidence and the company's stock performance.
These cases highlight how various factors, such as market conditions, business model sustainability, and management decisions, can significantly impact the success of a company post-IPO.
As of early 2024, two major trends in IPOs are shaping the landscape:
1. Increased Activity in Tech and AI Sectors
● Tech Dominance: The technology sector continues to lead in IPO activity, driven by ongoing innovations and high investor interest in tech-driven solutions.
● AI Boom: Artificial Intelligence (AI) companies are experiencing a surge in IPOs. Businesses focused on AI applications, machine learning, and automation are attracting significant investment due to their transformative potential across various industries.
● Cloud and Cybersecurity: Companies offering cloud computing solutions and cybersecurity services are also seeing heightened interest, as businesses and consumers prioritize data security and digital
transformation.
2. Sustainability and Green Tech IPOs
● Environmental Focus: There's a growing trend of companies in the sustainability and green technology sectors going public. These companies focus on renewable energy, electric vehicles, clean technology, and sustainable practices.
● ESG Investments: Environmental, Social, and Governance (ESG) criteria are becoming increasingly important to investors. Companies that demonstrate strong ESG commitments and sustainable business models are finding favorable market conditions for their IPOs.
● Government Incentives: Policies and incentives promoting clean energy and sustainable technologies are further boosting the
attractiveness of green tech IPOs.
These trends reflect the evolving priorities of investors and the market's focus on innovation, sustainability, and technological advancements.
There are various factors to consider before opting for an IPO, as you can see in the article The Introduction to IPO (Initial Public Offering)’ which clearly states the do’s and don’t in an initial public offering, so before you indicate an IPO make sure you do your homework well.
Poornima Singh!
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https://www.leadpreneurs.in/ for more such informative articles.