The Initial Public Offer route to going public

There can be no better lesson on the advantages of public ownership of companies than the ease with which banks and other publicly quoted companies raise new and cheap capital, Ambrose writes .

While some large and successful companies are still privately-owned, many companies aspire towards becoming a publicly-owned company with the intent to gain another source of raising funds for operations. An Initial Public Offering (IPO) represents a private company’s first offering of its equity to public investors. This process is generally considered to be very intensive with many regulatory hurdles to jump over. While the formal process to produce the IPO is well documented and as a result, is a fairly well-structured process.
The transformation of a company from a private to a public firm is a much more difficult process.

Transformation phases of an IPO
Henry Lariyetan, vice president, BGL Securities, a leading investment company, said a company goes through a three-part IPO transformation process: a pre-IPO transformation phase, an IPO transaction phase and a post-IPO transaction phase.

The pre-IPO transformation phase
This can be considered to be a restructuring phase where a company starts the groundwork toward becoming a publicly-traded company. For example, since the main focus of public companies is to maximize shareholder value, the company should acquire management that has experience in doing so. Furthermore, companies should re-examine their organizational processes and policies and make necessary changes to enhance the company’s corporate governance and transparency. Most importantly, the company needs to develop an effective growth and business strategy that can persuade potential investors that the company is profitable and can become even more profitable. On average, this phase usually takes around two years to complete."

The IPO transaction phase
This stage usually takes place right before the shares are sold and involves achieving goals that would enhance the optimal initial valuation of the firm. The key issue with this step is to maximize investor confidence and credibility to ensure that the issue will be successful.
For example, companies can choose to have reputable accounting and law firms handle the formal paperwork associated with the filing. The intent of these actions is to prove to potential investors that the company is willing to spend a little extra in order to have the IPO handled promptly and correctly.

The post-IPO transaction phase
The post transaction phase involves the execution of the promises and business strategies which the company is committed to in the preceding stages. The companies should not strive to meet expectations, but rather, beat their expectations. Companies that frequently beat earnings estimates or guidance are usually financially rewarded for their efforts. This phase is typically a very long phase, because this is the point in time where companies have to go and prove to the market that they are a strong performer that will last.

Dy, an investment banker, said the IPO process begins with contacting an investment bank and making certain decisions, such as the number and price of the shares that will be issued. Investment banks take on the task of underwriting, or becoming owners of the shares and assuming legal responsibility for them. The goal of the underwriter is to sell the shares to the public for more than what was paid to the original owners of the company.
Going public does have positive and negative effects, which companies must consider.

Advantages
Strengthens capital base, makes acquisitions easier, diversifies ownership, and increases prestige. Going public helps companies raise 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 stocks. Thus, mergers and acquisitions are easier to do because stocks can be issued as part of the deal.
Trading in the open markets means liquidity. This makes it possible to implement things like employee 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 and reasonable track record of performance could qualify for an IPO and it wasn’t easy to get listed.
Small companies looking to further the growth of their company often use an IPO as a way to generate the capital needed to expand.

The financial benefit in the form of raising capital is the most distinct advantage. Capital can be used to fund research and development, fund capital expenditure or even used to pay off existing debt. Another advantage is an increased public awareness of the company because IPOs often generate publicity by making their products known to a new group of potential customers.

Subsequently this may lead to an increase in market share for the company. An IPO also may be used by founding individuals as an exit strategy. Many venture capitalists have used IPOs to cash in on successful companies that they helped start-up.

Disadvantages
Even with the benefits of an IPO, public companies often face many new challenges as well. One of the most important changes is the need for added disclosure for investors. Public companies are regulated by the Securities and Exchange Commission (SEC) in regard to periodic financial reporting, which may be difficult for newer public companies. They must also meet other rules and regulations that are monitored by the Commission. More importantly, especially for smaller companies, is the cost of complying with regulatory requirements can be very high. Some of the additional costs include the generation of financial reporting documents, audit fees, investor relation departments and accounting oversight committees.

Public companies also are faced with the added pressure of the market which may cause them to focus more on short-term results rather than long-term growth. The actions of the company’s management also become increasingly scrutinized as investors constantly look for rising profits. This may lead management to perform somewhat questionable practices in order to boost earnings.

Before deciding whether or not to go public, companies must evaluate all of the potential advantages and disadvantages that will arise. This usually will happen during the underwriting process as the company works with an investment bank or issuing house to weigh the pros and cons of a public offering and determine if it is in the best interest of the company.
It puts pressure on short-term growth, increases costs, imposes more restrictions on management and on trading, forces disclosure to the public, and makes former business owners lose control of decision making.

For some entrepreneurs, making a company to go public is the ultimate dream and mark of success, usually because there is a large payout. However, before an IPO can even be discussed, a company must meet requirements laid out by the underwriters. Here are some characteristics that may qualify a company for an IPO:

In packaging an IPO, the Issuing House first of all looks at the salability of the of the offer using such characteristics as the issuer’s (the company’s) high growth prospects, innovative product or service, competitive strength in the industry, as well as its ability to meet financial and audit requirements.