Initial public offering (IPO)

1. IPO

http://www.investopedia.com/university/ipo/ipo.asp

2. Intro

The term initial public offering (IPO) slipped into everyday speech during the
tech bull market of the late 1990s. Back then, it seemed you couldn't go a day
without hearing about a dozen new dotcommillionaires in Silicon Valley who
were cashing in on their latest IPO. The phenomenon spawned the
term siliconaire, which described the dotcom entrepreneurs in their early 20s and
30s who suddenly found themselves living large on the proceeds from their
internet companies' IPOs.
So, what is an IPO anyway? How did everybody get so rich so fast? And, most
importantly, is it possible for mere mortals like us to get in on an IPO? All these
questions and more will be answered in this tutorial.

3. Selling Stock 

Selling Stock
An initial public offering, or IPO, is the first sale of stock by a company to the
public. A company can raise money by issuing either debt or equity. If the
company has never issued equity to the public, it's known as an IPO.
Companies fall into two broad categories: private and public.
A privately held company has fewer shareholders and its owners don't have to
disclose much information about the company. Anybody can go out and
incorporate a company: just put in some money, file the right legal documents
and follow the reporting rules of your jurisdiction. Most small businesses are
privately held. But large companies can be private too. Did you know that IKEA,
Domino's Pizza and Hallmark Cards are all privately held?

4. Private and public 

Private and public
It usually isn't possible to buy shares in a private company. You can approach the
owners about investing, but they're not obligated to sell you anything. Public
companies, on the other hand, have sold at least a portion of themselves to the
public and trade on a stock exchange. This is why doing an IPO is also referred to
as "going public."
Public companies have thousands of shareholders and are subject to strict rules
and regulations. They must have a board of directors and they must report
financial information every quarter. In the United States, public companies report
to the Securities and Exchange Commission (SEC). In other countries, public
companies are overseen by governing bodies similar to the SEC. From an
investor's standpoint, the most exciting thing about a public company is that the
stock is traded in the open market, like any other commodity. If you have the
cash, you can invest. The CEO could hate your guts, but there's nothing he or she
could do to stop you from buying stock.

5. Why Go Public?  

Why Go Public?
Going public raises cash, and usually a lot of it. Being publicly traded also opens
many financial doors:
– Because of the increased scrutiny, public companies can usually get
better rates when they issue debt.
– As long as there is market demand, a public company can always issue
more stock. Thus,mergers and acquisitions are easier to do because stock
can be issued as part of the deal.
– Trading in the open markets means liquidity. This makes it possible to
implement things likeemployee stock ownership plans, which help to
attract top talent.
Being on a major stock exchange carries a considerable amount of prestige. In
the past, only private companies with strong fundamentals could qualify for an
IPO and it wasn't easy to get listed.

6. Going public = sale  

Going public = sale
The internet boom changed all this. Firms no longer needed strong financials
and a solid history to go public. Instead, IPOs were done by smaller startups
seeking to expand their businesses. There's nothing wrong with wanting to
expand, but most of these firms had never made a profit and didn't plan on
being profitable any time soon. Founded on venture capital funding, they spent
like Texans trying to generate enough excitement to make it to the market
before burning through all their cash. In cases like this, companies might be
suspected of doing an IPO just to make the founders rich. This is known as
an exit strategy, implying that there's no desire to stick around and create value
for shareholders. The IPO then becomes the end of the road rather than the
beginning.
How can this happen? Remember: an IPO is just selling stock. It's all about the
sales job. If you can convince people to buy stock in your company, you can raise
a lot of money.

7. Going public = sale  

Going public = sale
The internet boom changed all this. Firms no longer needed strong financials
and a solid history to go public. Instead, IPOs were done by smaller startups
seeking to expand their businesses. There's nothing wrong with wanting to
expand, but most of these firms had never made a profit and didn't plan on
being profitable any time soon. Founded on venture capital funding, they spent
like Texans trying to generate enough excitement to make it to the market
before burning through all their cash. In cases like this, companies might be
suspected of doing an IPO just to make the founders rich. This is known as
an exit strategy, implying that there's no desire to stick around and create value
for shareholders. The IPO then becomes the end of the road rather than the
beginning.
How can this happen? Remember: an IPO is just selling stock. It's all about the
sales job. If you can convince people to buy stock in your company, you can raise
a lot of money.

8. Underwriting  

Underwriting
The Underwriting Process
Getting a piece of a hot IPO is very difficult, if not impossible. To understand
why, we need to know how an IPO is done, a process known as underwriting.
When a company wants to go public, the first thing it does is hire an investment
bank. A company could theoretically sell its shares on its own, but realistically,
an investment bank is required - it's just the way Wall Street works.
Underwriting is the process of raising money by either debt or equity (in this
case we are referring to equity). You can think of underwriters as middlemen
between companies and the investing public. The biggest underwriters are
Goldman Sachs, Credit Suisse First Boston and Morgan Stanley.

9. Negotiating 

Negotiating
The company and the investment bank will first meet to negotiate the deal.
Items usually discussed include the amount of money a company will raise, the
type of securities to be issued and all the details in the underwriting agreement.
The deal can be structured in a variety of ways. For example, in a firm
commitment, the underwriter guarantees that a certain amount will be raised
by buying the entire offer and then reselling to the public. In a best
efforts agreement, however, the underwriter sells securities for the company
but doesn't guarantee the amount raised. Also, investment banks are hesitant to
shoulder all the risk of an offering. Instead, they form a syndicate of
underwriters. One underwriter leads the syndicate and the others sell a part of
the issue.

10. Cooling off period

Once all sides agree to a deal, the investment bank puts together a registration
statement to be filed with the SEC. This document contains information about
the offering as well as company info such as financial statements, management
background, any legal problems, where the money is to be used
and insider holdings. The SEC then requires a cooling off period, in which they
investigate and make sure all material information has been disclosed. Once the
SEC approves the offering, a date (the effective date) is set when the stock will
be offered to the public.

11. Red herring and courtship

During the cooling off period the underwriter puts together what is known as
the red herring. This is an initial prospectus containing all the information about
the company except for the offer price and the effective date, which aren't
known at that time. With the red herring in hand, the underwriter and company
attempt to hype and build up interest for the issue. They go on a road show also known as the "dog and pony show" - where the big institutional
investors are courted.

12. Finalization

As the effective date approaches, the underwriter and company sit down and
decide on the price. This isn't an easy decision: it depends on the company, the
success of the road show and, most importantly, current market conditions. Of
course, it's in both parties' interest to get as much as possible.
Finally, the securities are sold on the stock market and the money is collected
from investors.

13. Finalization

As the effective date approaches, the underwriter and company sit down and
decide on the price. This isn't an easy decision: it depends on the company, the
success of the road show and, most importantly, current market conditions. Of
course, it's in both parties' interest to get as much as possible.
Finally, the securities are sold on the stock market and the money is collected
from investors.

14. What is it for you?

As you can see, the road to an IPO is a long and complicated one. You may have
noticed that individual investors aren't involved until the very end. This is
because small investors aren't the target market. They don't have the cash and,
therefore, hold little interest for the underwriters.
If underwriters think an IPO will be successful, they'll usually pad the pockets of
their favorite institutional client with shares at the IPO price. The only way for
you to get shares (known as an IPO allocation) is to have an account with one of
the investment banks that is part of the underwriting syndicate. But don't
expect to open an account with $1,000 and be showered with an allocation. You
need to be a frequently trading client with a large account to get in on a hot
IPO.
Bottom line, your chances of getting early shares in an IPO are slim to none
unless you're on the inside. If you do get shares, it's probably because nobody
else wants them. Granted, there are exceptions to every rule and it would be
incorrect for us to say that it's impossible. Just keep in mind that the probability

15. What is it for you?

As you can see, the road to an IPO is a long and complicated one. You may have
noticed that individual investors aren't involved until the very end. This is
because small investors aren't the target market. They don't have the cash and,
therefore, hold little interest for the underwriters.
If underwriters think an IPO will be successful, they'll usually pad the pockets of
their favorite institutional client with shares at the IPO price. The only way for
you to get shares (known as an IPO allocation) is to have an account with one of
the investment banks that is part of the underwriting syndicate. But don't
expect to open an account with $1,000 and be showered with an allocation. You
need to be a frequently trading client with a large account to get in on a hot
IPO.
Bottom line, your chances of getting early shares in an IPO are slim to none
unless you're on the inside. If you do get shares, it's probably because nobody
else wants them. Granted, there are exceptions to every rule and it would be
incorrect for us to say that it's impossible. Just keep in mind that the probability

16. No History 

No History
It's hard enough to analyze the stock of an established company. An IPO
company is even trickier to analyze since there won't be a lot of historical
information. Your main source of data is the red herring, so make sure you
examine this document carefully. Look for the usual information, but also pay
special attention to the management team and how they plan to use the funds
generated from the IPO.
And what about the underwriters? Successful IPOs are typically supported by
bigger brokerages that have the ability to promote a new issue well. Be more
wary of smaller investment banks because they may be willing to underwrite
any company.

17. The Lock-Up Period  

The Lock-Up Period
If you look at the charts following many IPOs, you'll notice that after a few
months the stock takes a steep downturn. This is often because of the lock-up
period.
When a company goes public, the underwriters make company officials and
employees sign a lock-up agreement. Lock-up agreements are legally binding
contracts between the underwriters and insiders of the company, prohibiting
them from selling any shares of stock for a specified period of time. The period
can range anywhere from three to 24 months. Ninety days is the minimum
period stated under Rule 144 (SEC law) but the lock-up specified by the
underwriters can last much longer. The problem is, when lockups expire all the
insiders are permitted to sell their stock. The result is a rush of people trying to
sell their stock to realize their profit. This excess supply can put severe
downward pressure on the stock price.

18. Flipping  

Flipping
Flipping is reselling a hot IPO stock in the first few days to earn a quick profit.
This isn't easy to do, and you'll be strongly discouraged by your brokerage. The
reason behind this is that companies want long-term investors who hold their
stock, not traders. There are no laws that prevent flipping, but your broker may
blacklist you from future offerings - or just smile less when you shake hands.
Of course, institutional investors flip stocks all the time and make big money.
The double standard exists and there is nothing we can do about it because they
have the buying power. Because of flipping, it's a good rule not to buy shares of
an IPO if you don't get in on the initial offering. Many IPOs that have big gains on
the first day will come back to earth as the institutions take their profits.

19. Avoid the Hype  

Avoid the Hype
It's important to understand that underwriters are salesmen. The whole
underwriting process is intentionally hyped up to get as much attention as
possible. Since IPOs only happen once for each company, they are often
presented as "once in a lifetime" opportunities. Of course, some IPOs soar high
and keep soaring. But many end up selling below their offering prices within the
year. Don't buy a stock only because it's an IPO - do it because it's a good
investment.

20. Tracking Stocks  

Tracking Stocks
Tracking stocks appear when a large company spins off one of its divisions into a separate
entity. The rationale behind the creation of tracking stocks is that individual divisions of a
company will be worth more separately than as part of the company as a whole.
From the company's perspective, there are many advantages to issuing a tracking stock. The
company gets to retain control over the subsidiary but all revenues and expenses of the
division are separated from the parent company's financial statements and attributed to the
tracking stock. This is often done to separate a high-growth division with large losses from the
financial statements of the parent company. Most importantly, if the tracking stock rockets up,
the parent company can make acquisitions with the subsidiary's stock instead of cash.
While a tracking stock may be spun off in an IPO, it's not the same as the IPO of a private
company going public. This is because tracking stocks usually have no voting rights, and often
there is no separate board of directors looking after the rights of the tracking stock. It's like
you're a second-class shareholder! This doesn't mean that a tracking stock can't be a good
investment. Just keep in mind that a tracking stock isn't a normal IPO.

21. Tracking Stocks  

Tracking Stocks
An initial public offering (IPO) is the first sale of stock by a company to the public.
Broadly speaking, companies are either private or public. Going public means a company is switching from
private ownership to public ownership.
Going public raises cash and provides many benefits for a company.
The dotcom boom lowered the bar for companies to do an IPO. Many startups went public without any profits
and little more than a business plan.
Getting in on a hot IPO is very difficult, if not impossible.
The process of underwriting involves raising money from investors by issuing new securities.
Companies hire investment banks to underwrite an IPO.
The road to an IPO consists mainly of putting together the formal documents for the Securities and Exchange
Commission (SEC) and selling the issue to institutional clients.
The only way for you to get shares in an IPO is to have a frequently traded account with one of the investment
banks in the underwriting syndicate.
An IPO company is difficult to analyze because there isn't a lot of historical info.Lock-up periods prevent
insiders from selling their shares for a certain period of time. The end of the lockup period can put strong
downward pressure on a stock.
Flipping may get you blacklisted from future offerings.
Road shows and red herrings are marketing events meant to get as much attention as possible. Don't get
sucked in by the hype.
A tracking stock is created when a company spins off one of its divisions into a separate entity through an IPO.
Don't consider tracking stocks to be the same as a normal IPO, as you are essentially a second-class
shareholder.

22. Facebook

Friday, May 18, 2012, was a big day for American tech giant Facebook. The
social media behemoth made its initial public offering (IPO) -- its debut as
a publicly traded company -- on the New York Stock Exchange that day. In
just one day of trading, Facebook sold 421.2 million shares of itself to
investors for $38 apiece, amassing a cool $16 billion in new capital just
about instantly [source: Bel Bruno]. Facebook's IPO became the largest
tech offering – and third largest overall -- in U.S. history.

23. AT&T Wireless

AT&T Wireless
AT&T Wireless, the mobile division of American telecommunications monolith
AT&T, just barely squeaked in its IPO before the dot-com bubble burst. The stock
market began to slide in mid-March 2000, and AT&T Wireless released its initial
public offering on April 26. Other tech companies withdrew their IPOs, but AT&T
gambled and went ahead with its offering. It paid off.
The wireless division's affiliation with its well-known parent certainly didn't hurt
its prospects. When trading began on the NYSE, AT&T Wireless released 360
million shares. Investors fell in step with underwriters' valuation of the stock,
with shares opening at $30.12 and closing at $31.75; its pre-offer value was
$29.50 [source: Portnoy and Jastrow].
By the time the bell rung to close the day on the exchange, AT&T Wireless had
raked in $10.62 billion in new capital [source:BusinessWeek]. It set the record for
the largest IPO in American history, a title the company would hold for six years.

24. Rosneft

Always one to buck the global trend,Russia did it again when it took OAO
Rosneft -- the state-owned oil company -- public. While many other large
IPOs were the result of the privatization of a state-owned entity, OAO
Rosneft was Russia's share sale of its own company. What's more, Russia
had put the oil giant together through seized assets from private
enterprises operating in the country.
A number of financiers balked at the IPO, considering it unethical. This
didn't stop Russia from offering the stock -- and other investors on the
Moscow and London exchanges from buying it. When OAO Rosneft went
public on July 13, 2006, it attracted $10.65 billion in capital, with shares
underwritten by bankers like JPMorgan and Morgan Stanley
[source: BusninessWeek].
OAO Rosneft released 1.38 billion shares of itself, valued at $7.55 apiece
[source: Bloomberg]. The IPO fell about $1 billion short of the company's
hope to raise $11.6 billion.

25. The Bank of China

The Bank of China (BOC) was a state-owned bank until it was spun off into
a publicly traded private lender during its IPO on May 23, 2006. The oneday total for purchases for shares ahead of the listing on the Hong Kong
exchange the following week -- attracting everyone from the bank's
everyday account holders to European banks like Royal Bank of Scotland -topped $9.7 billion [source: Lague]. When the final tallies were in, the
BOC raked in a whopping $11.1 billion during its IPO
[source: BusinessWeek].
The bank issued 25.57 billion shares, comprising just 10.5 percent of the
BOC, at the equivalent of about 38 cents apiece [source: Lague]. The
shares sold rapidly, despite reports of 75 cases of fraud and corruption
among the bank's leaders the year before. All told, Bank of China's IPO
was the biggest offering in six years.

26. Deutsche Telekom

When German telecommunications giant Deutsche Telekom AG issued its IPO on
Nov. 17, 1996, it was the largest in European history. The company that spawned
T-Mobile released more than 713 million shares of itself. By the end of the day,
Deutsche Telekom had raised $12.48 billion [source: BusinessWeek].
Trading on the European exchange began on Nov. 17, 1996, and raised the value
of the stock to $22.45. Investors who bought the stock as trading began and sold
it an hour later made a 19 percent profit for their trouble [source: Ascarelli].
Trading of what came to be one of the hottest telecom stocks in Europe at the
beginning of the dot-com bubble was heavy. It was so heavy, in fact, that the
European exchange extended their daily trading hours until 7 p.m. for a full week
following Deutsche Telekom's IPO [source: Ascarelli].

27. General Motors

When do the taxpayers benefit from an IPO? When a company that owes its life to a federal
bailout goes public in a big way.
In December 2008, President George W. Bush threw a $50 billion lifeline to General Motors,
which had been struggling (along with other American automakers) in the wake of the global
economic downturn that started in 2007. Unfortunately, that assistance didn't do much to keep
GM from filing for Chapter 11 bankruptcy in June 2009. As part of the company restructuring
that usually follows a Chapter 11 filing, the U.S. Treasury Department agreed to loan the
company another $30 billion -- in exchange for a 60-percent stake in the company once it got
back on its feet [source: ProPublica]. By the following month, the newly reformed GM was ready
to start operations once more.
By the following year, GM was one of the hottest companies on the planet. Investors couldn't
wait to buy their way in -- and the company knew it: Less than a week before its November
2010 IPO, the company's shareholders raised the estimated share price from between $26 and
$29 per share to between $32 and $33 a share [source:Isidore]. When GM finally went public on
Nov. 19, 2010, the automaker raised a staggering $15.8 billion, making it the second-largest IPO
in U.S. history. That cash infusion helped GM repay nearly half of its initial $50 billion bailout,
which resulted in nearly $700 billion in federal revenue [source: ProPublica]. That should make
the taxpayers very, very happy.

28. Enel

You may not have heard of Italian energy company Enel SpA, but you may
have gotten power from them at some point. The company has a
presence in 23 countries in Europe, North and South America and Asia. It's
the second largest energy company in Europe and it has a customer base
of 60.5 million -- about the population of the entire United Kingdom
[sources:Enel SpA, BBC]. The company is also well-known as a pioneer in
green energy, with investments in hydroelectric, geothermal, solar,
wind and biomass power generation.
It seems that none of this was lost on investors when Enel SpA went
public on Nov. 2, 1999. The formerly state-owned company was privatized
just ahead of Italy's move to adopt the euro as its currency. Its IPO of 31.7
percent of the publicly traded company (3.8 billion shares) raised $16.58
billion in capital for the firm, representing 10 percent of the value of the
Milan-30 blue chip business index [source: BusinessWeek].

29. VISA

Ever since the consortium of banks that issued the first Visa card in 1977 became
Visa International, investors chomped at the bit for the privately held American
credit card giant to go public. They would have to wait 31 years before they got
the chance. When Visa finally went public in March 2008, everyone expected a
huge windfall for the company. Everyone was right.
On Tuesday, March 18, 2008, Visa made its initial public offering on the New York
Stock Exchange. Despite going public amid the beginning of the global financial
crisis, Visa managed to rack up $17.9 billion in capital. By the end of the day, the
company's stock traded at $44 a share [source: Benner]. The following day, it
traded at $66 [source: Kaufman].
One reason Visa's IPO was so successful was the scrupulousness with which
underwriters JPMorgan and Goldman Sachs eyed buyers. The bankers vetted out
investors who might have flipped the shares they bought. Quick resales would
have harmed the company's capital accumulation, since the market could have
become flooded with already-purchased stocks.
Visa's IPO marked the largest in U.S. history at the time, demolishing AT&T's sixyear-old record of $10.6 billion.

30. NTT Mobile

When NTT Mobile Communications, a giant in Japanese wireless phones,
went public on the Nikkei 225 average on Oct. 12, 1998, the Asian market
was dull. The offering of stock in the company managed to bring the
market back to life, however. Ten days after NTT Mobile's IPO, the Nikkei
average had added 1,300 points to its 14,295 total in just a five-day span
[source: WSJ]. While other Asian markets were embattled, the IPO kept
the Nikkei chugging along.
The initial pre-offering value for shares in the company was 3.9
million yen; by the end of the day, they had risen to a close of 4.65 million
yen. By the time the bell had rung to end the day on the Nikkei, NTT
Mobile had amassed $18.4 billion in capital -- in one day. It was the largest
IPO in world history [source: NYSE].
Not a bad stock to purchase considering just over a decade earlier NTT
Mobile's parent company, Nippon Telegraph and Telephone, had managed
to raise more than $13 billion during its own IPO in 1986.

31. ICBC

The concept of the 2000s being the Chinese century got a shot in the arm on Oct. 20, 2006,
when the Industrial and Commercial Bank of China (ICBC) made its public debut on the Hong
Kong and Shanghai markets. The company raised the most ever in global history during an IPO,
an incredible $19.1 billion [source: BusinessWeek]. That amount is more than the total value of
all the shares in existence (calledmarket cap) for the Bank of Ireland. By contrast, the market
cap for ICBC was $140 billion, which made it the fifth largest bank in the world [source: Mann].
Rather than introduce a limited number of shares at a high price, the bank created 48.39 billion
shares at about 39 cents apiece. Demand for futures contracts (agreements to buy or
sell stock at a later date) for the shares topped $500 billion, which would have made it twice as
valuable as Citigroup, the largest bank in the world at the time [source:Chan].
Investors had good reason to pour their money into ICBC. The bank's retail customer base -everyday people who hold accounts and investments in ICBC -- at the time of its IPO was 153
million, or 10 million more people than the entire population of Russia [source:Chan].
The massive IPOs for two of China's biggest banks -- the Bank of China and the Industrial and
Commercial Bank of China -- proved that the growth of the Chinese economy was no fluke. But
who would've thought that yet another bank offering would trump both?