IPO: Initial Public Offering
An Initial Public Offering (IPO) is the first listing of a company's shares on a stock market. This type of operation generally has several objectives:
- to provide the company with new capital;
- to provide the company with an exchange currency valued by the market in the context of future external growth operations;
- provide liquidity to the company's shareholders;
- to raise the company’s profile in the eyes of its stakeholders (customers, suppliers, partners, banks, employees, etc.)
Characteristics of an IPO operation
The shares offered to investors in an IPO are either new shares (capital increase) or existing shares (sale by shareholders). The operations are generally structured with a majority of new shares, as investors prefer to bet on companies with a growth profile requiring the implementation of capital financing. In most cases, the proportion of capital offered to the public must represent at least 25% of the total, in order to ensure sufficient liquidity of the shares on the market.
The shares are offered to the market on the basis of a price range. This range is determined by two main sets of inputs: First, the valuations produced by the bank(s) team(s) advising the operation and by the financial analysts who follow the value throughout its stock market life. Second, the initial feedback received from investors on the proposed valuation prior to the placement of the shares itself.
The share placement period (usually 10 to 15 business days) is accompanied by a “roadshow” – a series of meetings between the company's management and prospective investors. The purpose of this roadshow is to convince investors to buy shares in the IPO.
Investors place their purchase orders with the introducing bank(s) during or at the end of the placement period, indicating a quantity and a price (generally within the indicative range). At the end of the placement, the final price of the shares is fixed according to the composition of the order book and the shares offered are allocated to the investors according to the quantities requested and the price offered (an order placed at a price lower than the final price will not be served).
Role of the bank
The introducing bank plays an advisory and marketing role for the offered shares:
- as an adviser, it helps the company to structure and calibrate its operation (ratio of new to existing shares, portion of the capital to be put on the market, etc.); to draft the regulatory documentation presenting the company and the operation and to get it validated by the market authority; to prepare all communication to the media, financial analysts and investors; and to value the offered shares;
- as a marketer of the offered shares, the bank organizes the meetings between the management and the investors (roadshows), solicits and collects investors' orders and prepares the allocation of the shares to the investors.
Depending on the size of the transaction, several banks may be involved in an IPO, some of whom may only act as underwriters of the shares offered to investors.