IPO: Initial Public Offering
Initial public offering (IPO) or stock market launch is a type of public offering in which shares of a company usually are sold to the general public, on a stock exchange, for the first time. Through this process, a privately held company transforms into a public company. Initial public offerings are mostly used by companies to raise the expansion of capital, possibly to monetize the investments of early private investors, and to become publicly traded enterprises. A company selling shares is never required to repay the capital to its public investors. After the IPO, when shares trade freely in the open market, money passes between public investors. Although IPO offers many advantages, there are also significant disadvantages, chief among these are the costs associated with the process and the requirement to disclose certain information that could prove helpful to competitors. The IPO process is colloquially known as going public.
Advantages of an IPO
An IPO accords several benefits to the previously private company:
- Enlarging and diversifying equity base
- Enabling cheaper access to capital
- Increasing exposure, prestige, and public image
- Attracting and retaining better management and employees through liquid equity participation
- Facilitating acquisitions (potentially in return for shares of stock)
- Creating multiple financing opportunities: equity, convertible debt, cheaper bank loans, etc.
Disadvantages of an IPO
There are several disadvantages to completing an initial public offering:
- Significant legal, accounting and marketing costs, many of which are ongoing
- Requirement to disclose financial and business information
- Meaningful time, effort and attention required of management
- Risk that required funding will not be raised
- Public dissemination of information which may be useful to competitors, suppliers and customers.
- Loss of control and stronger agency problems due to new shareholders
- Increased risk of litigation, including private securities class actions and shareholder derivative actions