Types of IPO
There are many types of IPO a private limited company can use to list on the stock market. An Initial Public Offer can use a combination of Fixed Price or Book Building Methods.
In the Fixed Price method shares are offered in advance to the investor. The Issue price is disclosed in the final Prospectus, which will go into detail regarding the variables that justify the price. The Final Price may not be in the draft prospectus as factors that determine the price may change during the period from filing to going public.
In this method, underwriters try to establish a price which to offer the IPO, based on interest shown by private investors. Book building involves ‘building orders’ from these investors based on the number of shares requested and at what price they are willing to pay. In this case, interested investors need to registrar an interest before ‘closing of the book’. Potential Investors are not made aware of the price in advance, only an indicative price range is known. Once this happens the underwriter will establish an initial selling price for the offering.
Reverse Takeover – ‘RTO’
This method of IPO involves a private company buying enough shares in order to qualify as the controller of the publicly traded company. The private company then exchanges its shares in the public company, this is when the private company complete the reverse takeover and becomes a publicly traded company.
One Advantage of this method is the fact the expensive fees associated with the IPO process are not necessary. Avoiding regulatory requirements and longer timescales involved with performing an IPO from the start. But on the contrary, the company does not gain any funds through the transaction. With the name of the company performing the reverse IPO becoming the name of the publicly traded company.
Venture Capital Backed
Known as an “exit strategy” for initial private investors to gain money out of what they invested in the company. This involves selling shares to the public as an alternative to being acquired by another company.
Problems and Risk of IPO’s
Cost – IPO’s have a high initial cost because they involve a large management team. Fees and Salaries can take up a sizable amount of the funds raised from flotation. Lawyers, Accounts, Investment Banks and Consultants are all required to get the company through an IPO.
Time – IPO’s typically last 3 to 12 months, depending on input from management, and how quick processes take. The process can also hinder key management’s focus on business development.
Disclosure of Information – all information regarding the company’s financial and legal situations needs to be disclosed in order to list. Sensitive information may result in company perception declining. Finances and business data become public information. Shareholders may file lawsuits, causing potentially costly settlements and a negative perception of the company.
Market Pressures – management will need to deliver on promises made in the Prospectus. Offering Short Term success rather than the company’s Long-Term ambitions.
Loss of Control – an overhaul of shares could lead to a hostile takeover of corporate management. Or if further equity is needed to meet company growth expectations, it could lead to control being given to public shareholders. With some decisions needing shareholders’ approval, rather than freedom of board approval.
Stock Price – Due to disclosure of financial information each quarter. It can lead to stock prices falling, and dumping of shares on the market if the company fails to meet its targets.
Over-Subscription of Shares – high demand for subscription of shares will lead to investors receiving few shares than initially anticipated and could pay a high price. Leading to unhappy investors.
Under-Subscription of Shares – Investors shares could not be worth the initially estimated value.
Ongoing Costs – this includes continuing costs for financial reports and statements that are filed with regulatory agencies that are also distributed to shareholders. As well as financial systems implementation and upgrade, to ensure the company adheres to financial rules and regulations.
The main market represents well-established companies, trading securities, debt and equity. Representing over 1300 companies worldwide from 40 different sectors. Catering for companies with a Premium or Standard Listing status.
The Main Market represents successful companies and offers them to raise further capital to fund growth. Whilst meeting the highest standards of information disclosure, corporate governance and regulation standards.
Listing on the Main Market has a numerous array of benefits besides large pools of capital, such as;
- High Profile Media Coverage
- Real-Time Share Prices
- Benchmark of FTSE UK Index
The Main Market also includes a High Growth Segment, enabling mid-sized companies to acquire essential capital and public exposure necessary for growth, with the ambition to join the Premium segment in the future.
Alternative Investment Market (AIM)
Empowering smaller growth companies from start-ups to well-established organisations, the AIM market currently holds 3600 companies worldwide, assisting them to expand through raising capital. With the benefits of a high-profile public market, with regulatory standards suited towards smaller organisations (AIM Rules).
Companies listing on AIM require a Nominated Adviser, who assists the company in successfully floating on the market, alongside other advisors within the selected IPO team.
Professional Securities Market (PSM)
The PSE differs from the other UK Listing Markets as it gives companies the ability to raise capital by listing specialist securities or depositary receipts to private investors, as opposed to equity.
Companies that issue debt or depositary receipts do not require historical financial information to be reported to required standards (i.e. IFRS).
Other Stock Exchanges
USA – New York Stock Exchange
Australian Securities Exchange
Hong Kong Stock Exchange
Singapore Stock Exchange
Tokyo Stock Exchange
Timing of IPO
Regardless whether the business plans to float, it needs to ensure the listing process is started at the right time, and if the business is at the right stage in its life to do so. Market Conditions play a pivotal role in the timing of an offering, but the business should also consider other key factors when thinking about going public.
Points to consider:
Pre-IPO Expenses – Initial upfront cost is a necessary for a company to float, as the process is significantly expensive which needs to be taken into consideration. The IPO team will take up a sizeable amount of the budget, as well as any other transactional costs.
Post-IPO Expenses – Once the company has successfully listed, there are additional ongoing tasks that will require further expenses. Listing means a company is subject to regulation, reporting on legal, accounting as well as investor relations requires an additional internal team or external consultants.
Loss of key Contracts & Customers – If the company loses key contracts and customers in months leading up to going public and subsequently produces poor results, it could lead to a drop in investor confidence. Likewise, in the months after floatation.
Time Consuming Process for Management and Resources – The IPO Process requires key management focus for an extensive period of time. Typically, the Pre-IPO phase requires 6-9+ months of planning, therefore other business commitments may be deprioritised or delayed until the company goes public.
Unforgiving Public Markets – Companies may need to alter business short term strategies to maintain the confidence of investors, who may look for relativity fast returns, rather than the long-term ambitions of the business.
Post-IPO Grace Period – Going Public can go downhill for some companies. The ‘grace period’ is relatively short, if investors lose confidence in the business its share price will fall, leading to less media coverage of the business. Resulting in the business finding it harder to raise additional capital to fulfil its long-term business plan.