What is an IPO? Going Public vs. Staying Private

What is an IPO?

An initial public offering (IPO) is the process by which a private company first offers shares of stock to the public. Also referred to as “going public,” an IPO is a significant milestone for most companies. It marks the transition from a privately owned organization to a publicly traded one on a stock exchange.

Why Do Companies Pursue IPOs?

There are several key reasons why a company may decide to hold an initial public offering:

Access to Capital

One of the biggest reasons companies decide to go public is to raise capital. Selling shares to the public provides access to a large pool of potential investors. The influx of cash can fund expansion plans, pay down debt, or acquire other companies.

Liquidity for Early Investors

An IPO provides liquidity to early investors and employees who hold stock options. It allows them to cash out a portion of their holdings. It also creates value for stock options held by employees.

Public Profile

The IPO process generates publicity and raises the company’s public profile. A high-profile IPO announces the company’s arrival on the big stage. It can enhance the company’s reputation and brand.

Future Fundraising

Once a company is publicly traded, it has an additional financing option through follow-on offerings. After the IPO, it can issue more stock via secondary offerings.

The IPO Process

The IPO Process

Preparing for and executing an IPO is an extensive, complex process that takes 12-18 months on average. Here are the key steps:

Choose an Investment Bank

The company selects one or more investment banks to underwrite the offering. The underwriter prices the shares, buys the claims, and resells them to investors on the open market.

Due Diligence

The underwriters thoroughly vet the company’s business model, financials, management, etc. The due diligence process aims to uncover any red flags or risks.

S-1 Filing

The company files a registration statement (S-1) with the SEC providing details about the company’s finances and operations. This allows the SEC to review the filing to ensure compliance with regulations.

Roadshow

The company management and underwriters meet with potential investors to generate interest in the upcoming IPO. This includes in-person meetings as well as presentations.

Pricing

The underwriters and company determine the price at which the shares will be offered. The offering price depends on investor demand gauged during the roadshow and market conditions.

Trading Begins

Once SEC approves registration, shares can begin publicly trading on the stock exchange. The IPO date is the first-day investors can buy shares on the open market.

Going Public vs. Staying Private

Going Public vs. Staying Private

For many high-growth companies, deciding whether to go public or remain private is complex. There are pros and cons to each path:

Benefits of Going Public

  • Access to capital for growth
  • Liquidity for early investors
  • Higher public profile
  • Ability to use the stock for acquisitions
  • Follow-on offering potential

Downsides of Going Public

  • Loss of control and flexibility
  • The requirement to disclose financials
  • Pressure to meet quarterly estimates
  • High IPO costs
  • Increased regulations and compliance

Benefits of Staying Private

  • Maintain decision-making control
  • Avoid quarterly earnings pressure
  • Stay out of the public eye
  • Less regulatory requirements

Downsides of Staying Private

  • Limited fundraising options
  • Lack of liquidity for early investors
  • Less prestige and public awareness
  • Difficulty attracting top talent
  • Unable to use stock as acquisition currency

Recent Trends in IPOs

The IPO market has seen several exciting shifts in recent years:

  • Number of IPOs declining overall compared to historical averages
  • Increase in PE/VC-backed companies opting to stay private longer
  • Rise of mega-IPOs raising over $1 billion, like Uber, Lyft, and Snap
  • Tech/internet companies Dominating IPO landscape
  • Strong first-day “pops” in share price for many IPOs

While going public was once considered the holy grail, the private market now offers abundant capital allowing companies to stay private longer. However, IPOs remain a significant liquidity event for investors and employees. Many anticipate the current IPO lull may be temporary until market conditions improve.

Weighing the Pros and Cons

The choice between an IPO and remaining private depends significantly on the company’s goals and circumstances. Key factors to consider include:

  • Capital needs and financing options
  • Investor and employee liquidity desires
  • Maintaining control vs. oversight
  • Public disclosure requirements
  • Prestige and branding opportunities
  • Stock’s value for acquisitions
  • Tolerances for earnings scrutiny

Companies must weigh all these dynamics carefully as they map out the ideal long-term path and capital strategy for their needs. With the proper preparation and expectations, an IPO can be a significant value-creating event.

Conclusion

An initial public offering marks a transformational shift for a company. It involves a lengthy process but provides access to capital and liquidity, enabling growth and success. While increasingly remaining private longer, an IPO is still a coveted milestone for many organizations. Carefully evaluating the tradeoffs of going public or staying private is crucial in charting the strategic course. With the right timing and execution, an IPO can help propel a company to the next level.

FAQs

What is the difference between an IPO and a direct listing?

In a direct listing, a company’s shares are listed directly on an exchange without issuing new shares or raising capital. Current private shareholders begin selling existing shares to public investors.

What does it mean when an IPO is oversubscribed?

Oversubscription occurs when demand for the IPO exceeds the number of shares issued. It indicates strong interest and usually results in a higher offer price.

What is the lock-up period after an IPO?

A lock-up period prevents insiders like employees and early investors from selling their shares for a period, typically 180 days post-IPO. This helps avoid flooding the market.

Who are the key players in an IPO?

The key players are the company, its board of directors, the underwriters, auditors, attorneys, and the SEC regulators.

How long does the IPO process usually take?

The typical IPO process takes 12-18 months from start to finish. However, the timeline can vary significantly depending on the situation.