Successful investors conduct thorough research, especially when it comes to initial public offerings or IPOs. It's hard enough to select good stocks when evaluating companies with a long history of excellent performance. But investing in the right IPO not only takes considerable research, but also an individual willing to take on a great deal of risk too.
In this article, we're going to talk about initial public offerings. As part of that discussion, we'll start by providing a definition of the term. Next, we'll describe how the IPO process works, and the advantages they offer investors. Then we'll finish up with some helpful information such as where to find calendars as well as the best time to launch an IPO.
Also known as a floatation or "offering," an IPO is defined as the first sale of shares of common stock to the public. Companies often issue stock to raise capital so they can expand operations. IPOs are also one of several ways venture capital firms can "cash out" their investment in an expanding business.
The process is ultimately regulated by the U.S. Securities and Exchange Commission, since the end state is the sale of common stock in the company "going public." A stepwise explanation of the IPO process appears below:
It's possible for the stock's price to increase significantly on the first day of trading on the stock market. This occurs for two reasons. The first has to do with the marketing of the IPO. Underwriters want to ensure that demand outpaces supply. Throughout the marketing phase of the offering, the underwriter may take orders for two to three times the number of shares trading on the first day of issue. This translates into extremely high demand for a somewhat limited supply.
The second reason the IPO offers investors a short-term advantage has to do with the pricing of the securities. Initial offerings often start out as under-priced shares of stock. As the price of the new stock increases dramatically, this helps to create "headline" news for the company. These positive news stories further increase demand for the offering.
For investors, aggressive marketing can lead to a temporary run up in prices. This is especially true if a large number of shares are held by company insiders, who are often prohibited from selling for up to six months following the IPO. In addition, companies may release a second wave of stock into the market. As the supply of stock catches up with its demand, a once hot issue can quickly turn into a poor long term investment.
In January of 2004, Google announced they were hiring Morgan Stanley and Goldman Sachs Group to manage their IPO. On April 29, 2004, Google completed their SEC S-1 form filing, and the process was underway. Google was one of the few dot-com companies offering investors real profits. In the first half of 2004, Google reported earnings of $143 million on sales of close to $1.4 billion.
Co-founders Sergey Brin and Larry Page insisted on a somewhat unconventional approach to the company's IPO. They wanted to hold a Dutch Auction for all sales, so that anyone could participate in the process. This was at odds with Wall Street, as well as investment banks, because this process would reduce fees.
After a falling out with Goldman Sachs, the lead underwriters for Google would be Morgan Stanley and Credit Suisse First Boston. In addition, as many as 29 financial institutions were named as underwriters including: Allen & Co., Ameritrade, Blaylock & Partners, Cazenove, Citigroup, Deutsche Bank, E*Trade Financial, Epoch Partners, Fidelity Capital Markets, Goldman Sachs, J.P. Morgan Chase, Lazard, Lehman Brothers, M.R. Beal, Merrill Lynch, Piper Jaffray, Thomas Weisel Partners, UBS, Wells Fargo Securities, William Blair & Co., and WR Hambrecht.
Just prior to the IPO, Google attempted to win over investors by reducing the price range of their shares from $108 to $135, down to $85 to $95 per share. The number of shares was also reduced from 25.7 million to 19.6 million.
Google's initial public offering occurred on August 19, 2004. On that day, a total of 19,605,052 shares were offered at $85 per share. Although the issue was surrounded by negative press, it remains one of the most successful technology company offerings to date.
The best time to launch a stock is when the market is near a peak. Admittedly, this is nearly impossible to predict. Companies also need to be forward thinking when launching an IPO because it typically takes three to six months to go through the entire process.
Before deciding if it's the right time to launch, companies need to consider the following:
The resources below provide up-to-date information for investors interested in learning more about upcoming offerings as well as IPO calendars:
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