Behind the Scenes of an Initial Public Offer (IPO)
Taking a company public is a long and cumbersome process. It requires access to specialized knowledge and is conducted in many phases. The process usually lasts for many months. The stages involved in this intensive process are as follows:
1. Appointment of Associates
The Initial Public Offering (IPO) process is not something that a company can manage on its own. There is the need for a team of specialists such as the underwriters, the book runners, auditors, legal counsel, the Registrar and the likes.
This requirement arises both from the fact that the services of these professionals are indispensable as well as the fact that such services are mandated by law. Once all the specialists are on board, the management can have a discussion with them regarding the scope of the services that they will offer, their compensation as well as the time frame required for the performance of such services.
2. Due Diligence
The IPO process requires that the company offer full and complete information regarding all material facts. Now, the company may not know what information is material and therefore needs to be explicitly stated. It is for this reason that the specialists that are aware of the legal requirements conduct their due diligence.
For instance, the auditors can confirm whether the internal controls being set up by an organization are strong enough to report correct information and fend off any manipulation. Similarly, the legal counsel can ascertain whether there is any significant litigation that the prospective shareholders should be made aware of.
The end result of this exercise is a list of material facts that are likely to affect the valuation of the company as well as the marketing of its securities during the IPO process. It must be noted that the due diligence process does not end. Rather, it is an ongoing process that continues till the company goes public.
The due diligence process results in a price tag being attached to the companys operations. Once the total valuation is known, the management and the shareholders can decide upon the number of shares that they would want to sell and at what price.
The company cannot precisely determine the final price at which they will be able to sell their shares. Hence, they often provide a price range. This price range needs to be approved by the board of directors and the majority of the existing shareholders.
4. Underwriting Agreement
Once the price has been determined, the underwriter can then decide whether or not, they want to guarantee the issue of shares at that price.
The various terms and conditions such as the covenants restricting the behaviour of the company, the rights and obligations of the underwriter, etc, are to be decided during this phase. All underwriting agreement usually have a market out clause which allows underwriters to walk away from their liabilities in the case of special circumstances.
5. Disclosure of Financials
Before any company has to be listed on the stock exchange, it has to provide information about its financials in the past. At least a couple of years of audited profit and loss statements, balance sheets as well as cash flow statements are required. These financials are often used to justify the price band at which the shares are being offered.
6. Preparation of Prospectus
The next step in the process is to prepare a prospectus. The form and content of the prospectus is usually standard. This form and content is governed by the laws of the land and also the regulations of the stock exchange where the listing is likely to take place.
The prospectus is an open-ended document. There are guidelines as to what needs to be disclosed. However, material information differs on a case to case basis. Usually, the company and their associates disclose the information obtained in the due diligence stage in the prospectus. It must be understood that the information being disclosed must be adequate as well as accurate.
Even the slightest risk such as any other business that promoters have that may create a conflict of interest scenario or any past litigations pending against the promoter also need to be brought to the notice of potential investors.
7. Filing of Prospectus
When the companys management and their associates are convinced about the fact that the prospectus is accurate, the can go ahead and file it with the registrar. Once the prospectus is filed, it then becomes an official document that is available to the general public. This is the reason why a press release often accompanies the filing of a prospectus. Investors can then use this prospectus to obtain more information about the companys operations and make an informed decision whether or not they want to invest in the company. The prospectus and the application form for buying the companys shares can usually be obtained for a nominal fee.
8. Marketing of the IPO
The next stage of the process involves the aggressive marketing of the stocks as a viable investment option. The underwriters will conduct road shows, and they also tap into their network of brokers to be able to sell these shares to the common investors.
At this stage of the process, companies usually invest a lot in their advertising as well. The idea is to look as presentable as possible to the investing public.
Underwriters often have contacts with large institutions and may try to do bulk deals with such institutions if they are unable to sell the shares to retail investors. Often, there is a bulk discount accompanying the bulk deal.
9. Public Listing
If the issuer meets all the guidelines of the stock exchange, they are then allowed to list their stocks there. At a date chosen by the companys management, the company officially gets listed as its stock starts trading on the exchange.
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