IPOs can be quite complicated. There is a lot of important information to keep track of for each IPO. It can also be difficult trying to stay informed of all the upcoming hot IPOs. This calendar makes tracking upcoming IPOs and understanding the relevant information incredibly simple. If you’re new to the stock market and wondering, “What is a dividend yield?”, you may not understand all the information provided, but once you gain a little experience, you’ll find it is fairly straightforward.
IPO Date – The date of the IPO is the first day that a company goes public. However, just because the company goes public does not necessarily mean that any investor is able to purchase stock in the company. There are some specific rules around IPOs that limit who can invest in IPOs.
Company – This column contains both the name of the company and the ticker symbol for the company. The ticker symbol is how the security is referred to on an exchange.
IPO Price Range – The price range is the anticipated stock price that the company expects to earn for selling a share. This number is part of the Form S-1 that the company must file with the Securities and Exchange Commission (SEC) prior to going public. The number is based on a variety of factors, including an assessment of the current financials of the company, potential for future earnings, and the market of the industry.
Number of Shares – This is the number of new shares that the company is offering.
Volume – The volume is calculated by multiplying the median price range by the number of shares.
What Is an Initial Public Offering (IPO)?
In the go-go days of the late 20th century, the dream of a generation of tech startup companies was to get big enough to either be bought out by a large company or attract enough interest from investors to undertake an initial public offering. In some cases, the founders were visionaries who, upon starting the business, had no interest in running a massive corporation. They were looking for an exit strategy that would allow them to sell and move on to the next thing.
In other cases, the company wanted the prestige and the credibility that came from being listed on a major exchange. It doesn't hurt that initial public offerings have a way of creating millionaires and billionaires. For example, Mark Zuckerburg took Facebook public in 2012 to the tune of over $16 billion. And that isn't the largest IPO—that claim belongs to the Chinese company (and Amazon rival) Alibaba, which conducted an IPO in 2014 that raised over $25 billion.
In this article, we'll review what an initial public offering is and why companies will issue them. We'll go over the pros and cons of IPOs and define the process in detail. We'll conclude by describing why it is difficult, though not impossible, for an individual investor to take part in an IPO and why not being able to participate may actually be a good thing.
Why Does a Company Issue an IPO?
The financing for a startup company comes from personal funds provided by the founders or owners and is frequently supplemented by business loans or through money provided by venture capitalists or angel investors. But the pool of investors is small, and there comes a point where a company needs to raise a large sum of money in order to achieve the type of growth that they desire.
In some cases, an IPO is issued as part of an exit strategy for the founders who may want to retire or to step away from the day-to-day operations of the business and want to profit from the initial investment that they’ve made in the business.
What Are the Pros and Cons of an IPO?
An Initial Public Offering (IPO) can significantly impact a company, bringing both opportunities and challenges. On the positive side, an IPO enables a company to raise substantial capital, access a wider investor base, and improve its public image, which can lower capital costs and spur growth. Conversely, going public introduces complexities such as mandatory transparency, increased operational costs, management distraction, potential stock price volatility, and greater scrutiny from competitors and the public.
The Pros:
- The company maximizes the amount of capital it can raise compared to their options as a public company.
- They gain access to a large and diverse investor group.
- Going public is usually a sign of financial health which can give the company a lower cost of capital.
- Typically, a company that goes public will gain marketing exposure which can create a short-term bump in both sales and profits.
- As a public company, they can use incentives such as stock options and dividends to attract management talent and skilled employees.
- An IPO can be used to facilitate an acquisition.
The Cons:
- The company will now have to disclose information about their business as a matter of public record including earnings reports, balance sheets, and tax information.
- They will have to absorb ongoing legal, marketing, and accounting costs that are required of a publicly traded company. Many of these can be significant.
- Their management team will have to dedicate the necessary time and attention to accurate reporting.
- The risk of the stock price going lower after the offering (i.e. the required funding will not be raised because the market does not accept the price).
- Competitors, suppliers, and customers will now have transparency in your financial information.
- A group of new shareholders with voting rights who could theoretically control company decisions through the board of directors.
- A presumption of risk from legal or regulatory issues such as class action lawsuits and other shareholder actions.
Largest IPOs
IPOs are not always large, best growth stocks, but the ones that are large come with the opportunity to make a lot of money in a short period of time. A few of the largest IPOs are Lyft, Uber, Snapchat, Facebook, and Beyond Meat.
LYFT (NASDAQ:LYFT) IPO – Lyft went public on March 21, 2019, at an offer price of $72. Lyft managed to beat its ridesharing competitor, Uber, to an IPO. The offer price for Lyft has been its highest price – since its IPO, the stock price has only decreased.
Uber (NYSE:UBER) – Uber went public on May 10, 2019, at an offer price of $45. Uber’s IPO was highly anticipated – the company had an IPO valuation of $82 billion. But Lyft beat Uber to an IPO and Lyft’s lackluster IPO caused Uber to go public with a stock price of $45, which was much lower than expected. The stock price has traded mostly lower than that since.
Snapchat (NYSE:SNAP) - Snapchat went public in March of 2017 at an offer price of $24. Snapchat had a hugely successful IPO and closed its first day of trading up forty-four percent. On its first day of trading, Snapchat was responsible for ten percent of all trading volume on the New York Stock Exchange. Snapchat was the first in the recent wave of tech IPOs.
Facebook (NASDAQ:META) IPO - Facebook went public in May of 2012 at an offer price of $38. At the time, Facebook’s IPO was the largest IPO in tech history of the United States.
Beyond Meat (NASDAQ:BYND) IPO – Beyond Meat went public on May 2nd at an offer price of $25. Beyond Meat makes animal-free meat products. Beyond Meat’s stock price tripled on its first day of trading. It has since dropped dramatically in price, only to double again.
An initial public offering is a lengthy process
Once a company has made the decision to go public, there is a formal underwriting process that they have to undertake. This is because the company can’t simply sell their private shares on the open market. They need a broker of sorts to act as a go-between for the company and the market. Investment banks such as Goldman Sachs Group, Credit Suisse Group, Morgan Stanley and Merrill Lynch, are invited in to conduct the IPO.
But before the underwriting process takes place, the company has to take another critical step. They must identify and/or hire a management team that is prepared and capable of addressing all the new issues that come with taking a company public such as:
- Understanding how the company’s business will change as a public company and be able to steer it towards growth.
- Obtaining financial statements that are audited using IPO-accepted accounting principles.
- Putting in place defenses for the company against possible takeover attempts.
- Developing sound corporate governance including establishing an independent board of directors and qualified officers
- Timing the IPO during a time of favorable economic growth
Once the management team is in place, the company can begin the underwriting process. As mentioned above, this starts by bringing in an investment bank who will work with the company to review the details of the underwriting agreement such as the amount of money the company is looking to raise and the type of securities that will be issued. With the details in place, the banks will make a proposal for how the IPO is funded. This is typically done in one of three ways.
- In a firm commitment, the bank agrees to buy the entire offer itself and reselling the shares to the public. In this way, the bank is guaranteeing that a certain amount of money will be raised.
- In a best-efforts agreement, the bank will agree to sell securities for the company but does not issue a guarantee for the amount raised. This may be done when there is a concern that market conditions will not be favorable. In this case, an investment bank looks to limit their risk, and potentially their profit by agreeing only to do their best to sell the shares but not guaranteeing a certain amount of shares be sold.
- In some cases, an investment bank may not be willing to accept all the risk of an IPO. In this case, they may take the lead in the IPO, but reach out to other investment banks to form a syndicate of underwriters who will each sell a part of the IPO.
Now the filing process begins. The lead investment bank will file a registration statement with the SEC. At one time, the SEC required this document to provide a full disclosure of company data including financial statements, management backgrounds, any known legal problems, where the money from the IPO is going to be used, who in the company will hold stock in the new public company, down to the minor details of something like their proposed ticker symbol. Once the filing is submitted and the company waits for approval, the company and underwriting bank will put together a “roadshow” where they market the IPO to prospective investors to gauge interest.
Once the SEC approves the filing, the company and the bank set the “effective date” when the stock will be offered to the public as well as the initial price per share for the offering. Sometimes an IPO lockup occurs to prevent the market from being flooded with too many shares.
The length of time between the filing and the effective date used to take months but has been significantly shortened. In some cases, that process can now be as short as 50 days. That’s because of an Obama-era initiative that allowed companies to write “confidential IPO filings” was expanded in 2017 to be available to all companies regardless of size. In these filings, the company could put together a draft document, but not commit themselves to submit sensitive financial documents or other information which, once submitted with the filing, become a matter of public record and can be seen by competitors. Also, a confidential filing allows companies to take a more analytical approach to the roadshow and adjust their presentation in response to feedback they receive. Companies such as Snap, Shake Shack and Twitter are among the companies who have taken advantage of the ability to initiate a confidential filing.
Can individual investors take part in an IPO?
An individual public offering is offered to institutional investors. This is because the company that is issuing the IPO is looking for large amounts of capital, which requires the kind of capital that is typically reserved for large investment banks. In very rare cases, if an individual investor is a client of an investment bank, and has the financial resources to do so, they may be invited to participate in the IPO through their brokers. This, however, is fairly rare.
Frequently after a company’s IPO, the price per share of the now-public company begins to increase as shares are available to be traded on a major stock exchange. This means that individual investors looking to jump in after the IPO will typically have to pay a higher price than the investors that took part in the initial public offering. However, this is not always the case. In some cases, the share price may go down after an initial public offering if analysts feel that the company is now overvalued. When this happens, the individual investors are exposed to less risk and may be able to buy shares at a discount to the IPO price.
The bottom line on initial public offerings (IPOs)
Initial public offerings (IPOs) are one of the easiest ways for a public company to gain access to a large amount of investor capital. The overall goal of an IPO is for the company to sell a large number of shares at above its market value, thus raising a lot of money for the company. Even though these are not cheap stocks to buy, the theory is that institutional investors will want to own a part of the company, and then individual investors will jump in on the secondary market once the company begins to be publicly traded.
However, when a company initially goes public, the owners and the company still retain a high percentage of stock, allowing them to continue to have an influence on the company’s direction despite the influx of new shareholders who have voting rights.
The decision to go from public to private is not an easy one and will require a company to take on expenses due to increased regulatory requirements. For this reason, in recent years, some companies are holding back from issuing IPOs to ensure they have the required funds to absorb the additional regulatory costs.
In an effort to spur interest in IPOs, the process for going public has shortened considerably in the past few years, due to the ability of companies to issue “confidential IPOs”. This allows a company to prepare a draft document to the SEC while they attempt to gauge the interest of institutional investors.
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