IPO: What is IPO, Advantages and Disadvantages Explained

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Simran Kaur
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IPO: What is IPO, Advantages and Disadvantages Explained

IPO

Companies that go through an IPO can gain many advantages for growth. Therefore, many companies view an IPO as one of the milestones that they should aim for. Today, in this article, we will introduce an overview of IPO, its advantages and disadvantages.

What is an IPO?

IPO stands for “Initial Public Offering” when a company goes private to a public company. In simple words, it is the process by which an unlisted business lists its shares on a stock exchange and makes them tradeable. Its abbreviation Initial (= first), Public (= open to the public). Offering (= act of selling or recruiting). An initial public offering, or IPO, is a stock market where shares of a firm are freely purchased and sold to an unspecified number of investors on a stock market set up by a stock exchange. It is called an Initial Public Offering because shares that cannot be made public unless listed are distributed to investors through a securities company.

A business can receive capital through an initial public offering (IPO) from a variety of general investors, enabling investments in the expansion of the business. Furthermore, as a listed company, you can expect to improve your name recognition and social trust. However, having a listing means that your firm has more obligations to the public and investors. The

Advantages of Initial Public Offering

The main advantages of IPOs are:

Enhance Name & Brand Recognition: Listing on the stock market enhances exposure to the outside world, such as news, and improves brand recognition among consumers and general investors. Additionally, completing a stringent screening procedure at the time of listing and having an audit by an auditing agency improve social reputation. This will boost the company’s credibility and sense of security and make it simpler to find business partners and attract clients. Additionally, we can expect collateral effects such as an increase in the number of applications from talented people.

Strengthen financial resources: IPP companies will be able to raise a large amount of money from regular people through the stock market. Furthermore, businesses typically benefit from the increased social legitimacy that comes with listing when it comes to indirect financing options like bank loans. The money obtained in this manner can be used to finance new initiatives that will spur growth or grow your company.

Strengthen management Structure: As a public company, we are required to improve transparency and governance from the preparatory stage for listing, so we can expect to strengthen internal controls and realize management with an awareness of compliance. By establishing corporate governance, you can expect to avoid risks such as scandals and information leaks. Additionally, it facilitates better working conditions and lowers employee turnover by making work easier for staff members. Financial institutions and investors tend to support companies that maintain consistent staff retention rates and uphold corporate openness and equity.

Accelerate and optimize closing: Public companies are required to submit regular financial reports Companies must provide these reports in a timely and efficient manner to comply with IPO regulations, which enhances the financial closing procedure. Having an audit conducted by an auditing agency also lends credibility.

Growth in the value of stocks: The market determines prices for stocks based on supply and demand, which drives up the value of shareholders’ assets. If the various benefits gained from being listed on the stock market lead to company growth, the stock price can also rise.

Increase motivation and create employee assets: If the stock price rises, you can also anticipate increasing employee motivation and building wealth by implementing a stock ownership program or offering stock options.

Business succession measures: By allowing founders and current owners to sell their shares on the open market, organizations can lower the risks associated with business succession and inheritance.

Realization of founder profits: After the initial public offering of shares after listing, founders can earn profits by selling their company shares. The money acquired can be put toward starting new ventures or individual investments.

Disadvantages of Initial Public Offering

The main disadvantages of IPOs are:

High management cost: Listed companies are required to set up internal controls and improve the accuracy and openness of their financial reporting. The cost of securing internal control systems, such as internal audit staff. Furthermore, human resources will have more work to do to ensure timely and quarterly disclosure.

Pre-IPO and post-IPO burden: An IPO requires extensive planning that requires a large investment of time and money. It is reported that listing preparations require a minimum of three years. More specifically, a great deal of time, staff, and other resources are needed to create a large number of documents, legal procedures, audits, evaluations, etc. Accounting auditors (auditing corporations), securities businesses, IPO consultants, and others incur various expenses (audit fees, transaction fees, advising fees, etc.) from listing preparation to listing examination. Costs like the stock exchange listing examination charge and the new listing cost will be incurred during the listing. After listing, costs including audit fees and shareholder meetings will be incurred in addition to the annual listing fees to the stock exchange. The larger the size of the company and the amount of funds raised through listing, the higher the costs tend to be.

Increased management & social responsibility: Listed businesses have to promptly release corporate information that is required to make investment decisions. For management, this increases the level of information disclosure and increases transparency. In addition, the responsibility to meet the expectations of shareholders and the market is increasing, and corporate social responsibility is also becoming more important. This covers the expenses associated with addressing governance, social, and environmental issues.

Acquisition Risk: If an IPO allows a large number of unspecified investors to freely purchase shares, the company is always at risk of being taken over. In the current era of globalization, actions against hostile takeovers seeking management rights will be required. It’s critical to sustain stock prices, stabilize shareholders, and make aggressive investments in growth to lower this risk.

Deal hostile (uninvited) TOB and other stock acquisitions: Since a limited number of stockholders have unrestricted access to the stock market, takeovers are a constant risk on stock markets. It’s also important to remember how to take action against a hostile TOB (without permission) to seize control of management from the point of listing preparation.

Shareholder measures (communication): There will be an unknown number of shareholders as a result of getting listed. It is necessary to retain the financial advantages like dividends and stock sales, that a large number of general shareholders find appealing, as well as countermeasures like the efficient running of shareholder meetings given that not all stockholders are amicable. Activists, or vocal shareholders, have been pursuing corporate governance reforms more and more in a growing number of cases in recent years. Compared to a few years ago, there are a lot more factors to take into account, such as making sure the board of directors is successful, making sure there is diversity, and reacting to sustainability.

Incurrence of listing maintenance costs: Even after listing, there are still payments to be paid: annual listing fees to the exchange, audit fees to the auditing agency, stock administration fees to the trust bank that keeps track of the shareholder registry, etc. In addition, there are expenses for setting up a timely disclosure system, managing shareholder meetings, and investor relations.

FAQs:-

1. What is an IPO, and how does it work?
– An IPO, or Initial Public Offering, is the process through which a privately-held company offers shares to the public for the first time, thereby becoming a publicly-traded company. It involves listing shares on a stock exchange, allowing them to be freely traded among investors.

 

2. What are the advantages of going public through an IPO?
– Advantages include access to capital from public investors, enhanced brand recognition and credibility, improved financial resources for growth initiatives, strengthened management structure and corporate governance, increased liquidity for shareholders, and opportunities for founders to realize profits.

 

3. What are the disadvantages of conducting an IPO?
– Disadvantages may include high management costs associated with regulatory compliance and financial reporting, significant pre-IPO and post-IPO burdens in terms of time and resources, increased management and social responsibility, acquisition risk, deal hostile takeovers, and ongoing shareholder communication and maintenance costs.

 

4. How long does it take to prepare for an IPO?
– The preparation for an IPO can take a minimum of three years, involving extensive planning, legal procedures, audits, evaluations, and other requirements to meet regulatory standards and market expectations.

 

5. What are the key factors to consider before deciding to go public?
– Key factors include assessing the company’s readiness for increased transparency and regulatory compliance, evaluating the potential benefits and costs of going public, considering the impact on existing shareholders and management, and determining the company’s long-term growth strategy.

 

6. How does an IPO impact existing shareholders and company founders?
– An IPO provides existing shareholders, including company founders, with the opportunity to sell their shares to the public, thereby realizing profits. However, it also subjects them to ongoing regulatory requirements and shareholder expectations.

 

7. What is the role of investment banks in the IPO process?
– Investment banks typically act as underwriters in the IPO process, assisting the company with valuation, pricing, and marketing of the offering. They help facilitate the sale of shares to institutional and retail investors and may provide advisory services on the timing and structure of the IPO.

 

8. How are IPO shares allocated, and who gets priority in the allocation process?
– IPO shares are typically allocated to institutional investors, such as mutual funds and pension funds, as well as retail investors who place orders through their brokerage accounts. Priority in the allocation process may be given to institutional investors or preferred clients of the underwriting banks.

 

9. What factors influence the pricing of IPO shares?
– Factors influencing IPO pricing include market conditions, demand from investors, the company’s financial performance and growth prospects, industry comparables, and the advice of underwriters and financial advisors.

 

10. What happens after an IPO is completed?
– After an IPO is completed, the company becomes subject to ongoing regulatory requirements, including financial reporting, shareholder communication, and corporate governance practices. The company’s shares begin trading on the stock exchange, and its performance is closely monitored by investors and analysts.

 

 

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