Initial Public Offering (eBook)

An Introduction to IPO on Wall St

Marc Rene Deschenaux (Autor)

eBook Download: EPUB

2021 | 1. Auflage
246 Seiten
Bookbaby (Verlag)
978-1-7364515-0-2 (ISBN)

Infos

The IPO - Initial Public Offering is the most complex financial transaction as it involves knowledge in finance, in many national and international laws, in marketing trends analysis, in macro- and micro- economy, in financial public relations, in econometrics, in fundamental corporate analysis, in financial and securities markets analysis as well as in accounting, whether traditional, financial or analytical.Too many people, including experts, talk about the IPO without any understanding of the other fields involved beside their own. Everyone pretends to know, what they really do not know, because it requires multiple different fields of knowledge and because the Initial Public Offering transaction is at the crossroad of these disciplines.This is why I decided to write a series of books about the IPO, teaching real knowledge, killing the myths or fake information and providing real knowledge in all of the above mentioned fields and disciplines combined.This is the first book of the series allowing the reader to apprehend the environment and the context in which the IPO occurs.

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The IPO - Initial Public Offering - is one of the most complex financial transactions. Understanding the process is not easy, and far too many people, including experts, talk about the IPO without any understanding of other fields outside of their own. This informative guide was written to share real knowledge that debunks myths and fake information, as it provides real knowledge and perspectives from multiple fields and disciplines. Understanding the IPO requires knowledge in finance, in many national and international laws, in marketing trends analysis, in macro/micro economy, in financial public relations, in econometrics, in fundamental corporate analysis, in financial and securities markets analysis as well as in accounting, whether traditional, financial, or analytical. This book shares need-to-know information that is supported by an understand of all the fields and disciplines. It is the first book of the series that helps readers to apprehend the environment and the context in which the IPO occurs.

Textauszug

2. Introduction to IPO

Before a company goes public through an IPO, it has a limited number of shareholders and thus the capital available to it is also limited.

No matter how much money you have available to pump into your business through personal investments, strategic partnerships, angel investors, or venture capitalists, it can never match up to what you would have by going public.

When you go public with your company, you expand your pool of potential investors and are ultimately able to raise more capital than before. Let me explain this using a real-life example.

Our childhood is probably is the most interesting period in our lives. Not only is it a time when we have the most fun, but it is also a time when we love to experiment.

While the amount of experimentation someone did during their childhood would vary from person to person, certain experiments were done by all of us. One of them was experimenting with a waterspout.

If you recall your childhood days, playing in the garden with a waterspout would probably be one of the first memories to come to mind. Do you remember what happened when you pressed your thumb against the waterspout? You felt pressure beneath your fingers, right?

And what happened when you let loose? The water splashed out all at once upon release and reached a greater elevation than it would have if you simply opened water and let it flow out.

What do you think made the difference in the first case? It was the pressure applied.

Within a waterspout, water collects at the same place and all of it is released at the same time. If no pressure is applied to the water, it will simply flow out without any particular direction or energy.

The same is applicable to the securities market where offer and demand are fluxes that can be compared to water flows. Both offer and demand fluxes are dealt with by an Initial Public Offering (IPO) within the same instant.

To understand what makes an IPO so valuable, you need to know its alternatives and what they accomplish.

The first alternative to an IPO is a merger. While it is a good way for a private company to increase its stock price, a merger will only go through if the private company adds to the revenue, profit, or valuation of the publicly limited company it is merging with.

On the other hand, a reverse merger—the other alternative to an IPO—is an easy route to becoming a public company but it will rarely, if ever, result in an increased stock price of the company. This is because many of the problems and challenges that caused the public company being bought to become a shell—a company that exists only on paper and has no active offices, employees, bank accounts, assets, or passive investment holdings—will remain. In other words, there will never be enough market making to reach even a fraction of the performance of an IPO. With the above in mind, the best solution for private companies is to go public through an IPO!

2.1 What is an IPO?

An initial public offering (IPO) is how most companies get established as a public corporation. While some businesses are newly formed from scratch through an IPO, most firms transition from an existing business into a corporation through an IPO.

An IPO changes many things about the way that management runs the firm and can present opportunities and dangers for investors. IPOs are more common during bull markets and a booming economy. A rally in the overall stock market provides a fertile environment for these corporate events.

2.2 What is an IPO Valuation?

An initial public offering (IPO) is the method of converting a private-owned business into a public corporation whose shares are exchanged on a stock exchange. This method is often alluded to as "going public." The company is owned by the shareholders who buy its stock after it becomes a public enterprise.

Many shareholders who take part in IPOs are unaware of the procedure through which the value of a business is ascertained. An investment bank is employed before the public disbursement of the stock to ascertain the business’s value and its shares prior to their listing on an exchange.

For investors, assessing a corporation with a newly issued stock that was not previously listed on a stock exchange may be intimidating. However, savvy investors may seek to comprehend the financials of a business by analyzing its registration documents and then reviewing its financials to decide if the stock is valued fairly.

Furthermore, it is necessary for anyone serious about being an early investor to study the different aspects of how an investment bank performs an IPO valuation for a business.

2.2.1 The Components of an IPO Valuation

An effective IPO is based on the customers’ interest in the shares of the company. Strong demand would result in higher stock prices for the business.

In addition to the market for the shares of a business, there are many other variables that decide an IPO valuation, such as similar stocks in the market, growth potential, and the company's background.

2.2.2 Demand for Company’s Stock and IPO Valuation

Strong demand for the stock of an enterprise does not inherently mean that the business is worth more. It does, however, imply that the business would have a higher valuation.

An IPO valuation is the mechanism by which an expert establishes the fair value of the stock of a company. Due to market conditions and an IPO’s timing, two similar businesses can have very distinct IPO valuations.

Typically an enterprise can only perform an IPO when they conclude that there is strong demand for their products. Many tech companies had huge IPO valuations at the height of their boom in 2000.

They earned significantly higher valuations in comparison to the businesses that later went public, and as such, they were the beneficiaries of much higher venture capital. This was primarily due to the fact that, in the earlier part of the 2000s, tech stocks were rising and had an extremely high demand; the higher valuation was not simply a result of these companies' dominance.

2.2.3 Industry Comparables

Industry Comparables are another component of IPO valuation method. If the IPO applicant is in a market with similar publicly listed firms, a comparison of the valuation parameters attributed to its rivals will be included in the IPO evaluation.

The reasoning is that investors would be able to pay the same price for a new market entrant as they already do for existing businesses.

2.2.4 Growth Prospects

An IPO valuation is highly dependent on future growth forecasts for the business. The main goal behind an IPO is capital financing to fuel growth ambitions. The successful selling of an IPO is generally dependent on the forecasts for the business, and whether or not they will grow strongly.

2.2.5 A Compelling Corporate Narrative

Not all of the variables constituting an IPO valuation are measurable. The story of a corporation can be as important as the predictions of a company's sales.

A valuation method may determine whether or not a corporation provides a new product or a service that can fundamentally change an industry or be at the forefront of a new business model.

The companies that invented the Internet in the nineties are a perfect example of this. Since they were pushing innovative and revolutionary innovations, some of them achieved multibillion dollar valuations. This was inspite of the fact that they didn't generate any income at the time.

Through recruiting experienced professionals and advisors to their workforce, some businesses will fabricate their corporate image by attempting to create the impression of being a company with seasoned management.

Often a company's actual results can be distorted by its marketing strategy. This makes it crucial for early investors to study a business’s financial and be mindful of the consequences of investing in a firm which has no proven trading history.

2.2.6 Risks of Investing in IPOs

An IPO aims at selling a set number of shares at an acceptable price. As a result, businesses typically only undertake an IPO when they expect that there will be strong demand for their stock.

If the demand for a business’s stock is favorable, it is often probable that the speculation around the offers of the firm will eclipse its reality. This provides a favorable situation for the business to collect money, but not for those looking to invest in its stock shares.

2.2.7 Key Takeaways

In addition to the market for the shares of a business, there are many other variables that decide an IPO valuation, such as similar stocks in the market, growth potential, and the company's background.

Often a company's actual results can be distorted by its marketing strategy. This makes it crucial for early investors to study a business’s financial and be mindful of the consequences of investing in a firm which has no proven trading history.

An aspect of the IPO launch process is that businesses are expected to generate cash flow statements, income statements, and public balance sheets.

One drawback of buying shares in IPOs is that businesses generally don't have a strong tradition of reporting their financials, and they don't have a proven trading history. As such, it can be difficult to predict those...

Produkt-Details

• Erscheint lt. Verlag: 3.9.2021
• Sprache: englisch
• Themenwelt: Wirtschaft ► Betriebswirtschaft / Management ► Finanzierung
• ISBN-10: 1-7364515-0-2 / 1736451502
• ISBN-13: 978-1-7364515-0-2 / 9781736451502