What is an IPO and why it is needed

In the network, you can often find stories about how companies entered the stock exchange and held an IPO, which resulted in the founding of businesses becoming billionaires. However, not everyone knows how much work is behind this process of moving a company from private to public. Today we will look at this process step by step.

What is an IPO

When a company wants to offer its shares to the general public, it holds an IPO (Initial Public Offering - IPO). Accordingly, the status of the organization changes - instead of private (anyone can not become a shareholder), it becomes public (anyone can become a shareholder).
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Private companies may have shareholders, but there are not so many of them, and such companies are faced with the requirements of regulatory bodies other than those that apply to public ones. The process of preparing an initial public offering of IPOs takes from several months to a year and costs the company quite substantial funds.

Why do companies hold IPO

It's all about the money - the company wants to raise funds. After receiving this money can be used for business development or, for example, reinvestment in infrastructure.

Another advantage of the presence of publicly traded shares of the company is the ability to offer options to top managers, enticing the best specialists. In addition, the shares can be used in mergers and acquisitions, covering part of the payment - with the purchase of Facebook WhatsApp, the founders of the messenger received a significant portion of $ 19 billion shares of the social network, which has already entered the stock exchange. Getting listed on the world's largest stock exchanges — the NYSE or NASDAQ — is simply prestigious.

First steps in preparing for an IPO

A company that has gathered on the stock exchange hires an investment bank (or several banks) that will be involved in the process of organizing an IPO. Theoretically, it is possible to organize trade in their shares and independently, but in practice no one does this. Banks involved in organizing an IPO are called underwriters.

After the bank is hired - for example, Goldman Sachs or Morgan Stanley - negotiations are held between their representatives and the company’s management, during which the price of the shares offered for purchase, their type, and the total amount of funds to be raised are determined.



After an agreement is signed between the company and the underwriter, the latter submits an investment memorandum to the regulatory body of the specific country. In the USA it is the Securities Commission (SEC), and in Russia it is the Bank of Russia. This document contains detailed information about the offer and the company - financial statements, management biographies, lists the existing legal problems of the organization, the goal of raising funds and discloses a list of current shareholders of the company. The regulator then checks the information provided, and, if necessary, requests additional data. If all the information is correct, then the IPO date is assigned, and the underwriter prepares all the financial data of the company.

What is the interest of underwriters

Investment banks invest their funds in the organization of IPO and "buy" the company's shares before they finally get listed on the stock exchange. Banks earn on the difference between the price of shares, which they paid before the IPO, and the price that is set at the time of the start of trading. When a promising company enters an IPO, the competition of banks for the right to become an IPO underwriter can be very serious.

To attract interest in IPO, underwriters often run an advertising campaign (Road Show), during which they present information collected earlier about the company's financial performance to prospective investors, sometimes even in different parts of the world. Usually the road show is arranged for large investors. Often, such investors are offered to buy shares before the start of official trading — this process is called allocation.

Stock price, stock exchange

When the IPO date is approaching, the underwriter and the company entering the stock exchange agree on the price of the shares. The figure may depend on many factors: the prospects of the company itself, the results of the Road Show and the current market situation.

Similarly, with underwriters, exchanges compete for the placement of large and promising companies, for which the appearance of such a company in listing means an increase in overall liquidity and trading volumes. Also plays a role and prestige. In the case of such a popular company, representatives of the stock exchanges appear before its leadership, explaining the advantages of placing shares on its platform.

IPO stock purchase

Private investors can not buy shares of the company before the official start of trading. Often, in the first days of trading, stocks of new companies are subject to strong fluctuations, so analysts usually advise not to rush into making deals, and wait until the price is established at a more or less stable level.

Why Russian companies are holding an IPO abroad

Recently, Russian companies have begun to show some activity on the Moscow Stock Exchange (Yandex conducted an additional placement of shares, and Dozhd, Bolshoy Gorod and Slon.ru plan to unite into a holding and carry out an IPO). Nevertheless, most of the exchange activity of Russian companies occurs abroad.

This is what Sergey Egishyants, the chief economist of ITinvest, thinks about this:

Everything is obvious: capital in the West - therefore, companies from all over the world, including Russian ones, place their securities there. Recently, IPOs in the PRC are gaining popularity - because the local capital market has also swelled to a fair scale, so many people are trying to attract Chinese money.

Western and eastern investors are in no hurry to enter Russian sites - for many reasons (the protection of property rights does not arouse enthusiasm, the market capacity is much less, and so on). Theoretically, of course, there are a lot of capital in Russia, but this is only if we look formally: it is clear that most of the free (!) Assets owned by big businessmen and some politicians are not placed in Sberbank accounts, but in Western offshores, funds and banks. In such conditions, the behavior of Russian firms seeking accommodation in the West is quite natural.

IPO of Russian companies in 2005-2013 Data source: PWC

Pros and cons of holding an IPO

The fact of an IPO for a company is usually positive, because it means that it has grown enough to qualify for raising capital in a similar way - it is used only when you really need a lot of money for large-scale expansion. In addition, public companies attract much more attention, which makes it easier for them to hire staff and the marketing process.

Among the shortcomings of the IPO, it is possible to note the increasing attention to the company from the regulatory authorities after the exit to the stock exchange - there are a large number of requirements of both the state and the exchange platforms themselves, which companies trading in them must fulfill. In particular, this concerns the issuance of financial statements. In addition, the founders of the company are not always able to immediately sell their shares after an IPO and become millionaires, as this can lower their rate and capitalize their business.

Links related articles:

• "Rain", Slon.ru and "Big City" will unite into a holding and will hold an IPO on the Moscow Stock Exchange
• Yandex will place its shares on the Moscow Exchange
• Work in international markets through ITinvest
• How is the exchange trading in Russia