How A IPO Starts -- Described Below
All About Initial Public Stock Offering (IPO's)
The question is often asked how to go about purchasing an Initial Public Offering (IPO). Unfortunately, it's not so easy. However, to understand why, we will explain how a company goes from the point A where they decide they want to go public, to point B where they actually go public and their stock shares are sold publicly.
When companies are considering an IPO they must first evaluate the financial issues to decide whether it is a viable financing option, and they must identify which means they wish to use to sell the Initial Stock Offering.
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During recent years there's been a growth in Internet companies, run by online investment bankers, or "e-managers" where companies and investors can buy and sell initial public offerings (IPO's) for corporate stock. Companies have a choice of using an traditional investment banker, or an online investment banker, when selling their IPO.
In this report we focus on the second decision. The issue that arises from this choice is to identify the differences between the traditional IPO process and the new information technology enabled process. Based on an analysis of several online investment banking firms, we identify the implications this new market has for companies making a stock offering, traditional investment bankers, the new online intermediaries, and both larger and smaller investors.
TRADITIONAL IPO PROCESS
The traditional IPO process involves the company selling the IPO, an investment banker that acts as an intermediary between the seller and buyers, and a select group of typically larger investors. This process has been used for IPOs for well over a century, but some inefficiencies have evolved during that time.
The traditional investment banker receives a commission on the amount of money raised in the IPOs. Besides transaction costs, there is the practice of "spinning." Spinning involves investment bankers giving out shares to favored or potential customers in hopes of winning future business.
Several firms have been investigated by the SEC for such practices. Theoretically, companies should be able to make more money on their IPO by receiving a price closer to the price at which the shares begin trading on.
The regular investment banker provides services such as pricing the initial offering and providing access to a select group of large investors.
The initial trade of some IPOs can be sharply above their offering price, enabling the investors to pocket a quick profit that might otherwise have gone to the company. Because of high transaction costs and a less than open market, a new information*technology enabled IPO process has emerged in the past few years.
NEW IPO PROCESS ENABLED BY INTERNET MARKETS
The new IPO process involves the same seller, but a different form of intermediary. The new online investment banker provides an Internet-based IPO market with access to a more open market including a larger number of smaller investors. The primary goal is to level the Wall Street playing field by giving the little guy, who are the individual investors, a chance to invest in a company when it first offers shares to the public and before the stock actually begins trading in the markets.
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Implications for Companies Selling Initial Public Stock Offering. Since firms now can do IPO's online they seem to have more risk in comparison to using online investment banker. If they use the new online process they can reduce their commissions and sell their IPO to a larger number of smaller investors which shifts profits to them and away from the investment banker and the larger investors. Their choice is the classic risk versus return scenario.
Initial Public Stock Offering Trader Implications. The first implication for I.P.O. investors is that large investors will, in many cases, lose their protected status that allowed them the first chance to purchase a new stock offering. The market will be more competitive from the buyer side. The second implication is that smaller investors will now have a better chance to buy stock through IPOs.
Traditional Investment Banker Implications. The first implication for traditional investment bankers is that they can expect competition from online firms for public stock offering's with the result being less demand for their services. This is especially true for new Internet-based companies that wish to maximize the revenues they receive from their IPO. The second implication is a more competitive market will reduce the percentages paid by companies for the investment banking services. Even when their services are preferred it will be difficult to demand the traditional higher commission rates they commanded in the past.
Implications for Online Investment Bankers. The first implication for online investment bankers is that they should expect an increase in the number of IPO offerings being made through the Internet because transaction fees are lower. Lower transaction fees, and access to a larger market, provide financial benefits to both IPO sellers and buyers.
The second implication is these companies have 2 strategic options in this new "e-manager" market. To enter the IPO intermediary market, companies will likely have to initially compete on price, by offering their services for a low commission rate. The online investment bankers who succeed in the long run will be the ones that are an early market entrant and become a trusted intermediary.
Once the intermediary company has gained a reputation as a trusted broker for IPO sales, they can increase their fees as they differentiate themselves from late market entrants.
The overall conclusion of this Initial Public
Stock Offering special report is IPO sellers and buyers are better
off with more investment banking options. IPO sellers now have a
choice of 2 alternatives each with their own strengths and weaknesses.