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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. 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. Thus,mergers and acquisitions are easier to do because stock can be issued as part of the deal. 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. 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. 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. 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.
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. 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. 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. 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.
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 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. 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 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. 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. 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. 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.
On average, each Facebook user would need to buy 2 shares! Notice that in both cases there is an initial bump in the price of the stock. All shares sold during this period are sold at a profit. The IPO. Define the broader group of investments this tool belongs to. Common Stocks are the basic group for all. Stock Market Basics. Going Public: Slang for when a company. Chapter 5 Financial Markets and Institutions.
Role of the financial market : allocate scarce resources capital from savers suppliers to investors. Stocks and The Stock Market. Why do we need a stock market? Where do stocks come from? Why do people buy and sell it? Introduction to Stock Market. Budgeting and Financial Planning. Budgets Budget: A plan for how a person, family, or organization will raise and spend money.
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Why do we need a stock market? Where do stocks come from? Why do people buy and sell it? Introduction to Stock Market. Budgeting and Financial Planning. Budgets Budget: A plan for how a person, family, or organization will raise and spend money. Why do you think it is.
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The main reason that the company decided to go public is because it crossed the threshold of shareholders, according to Reuters financial blogger Felix Salmon. Facebook did accept investments from companies, and these investments suggested fluctuating valuations for the firm. In Microsoft beat out Google to purchase a 1. Zuckerberg wanted to wait to conduct an initial public offering, saying in that "we are definitely in no rush.
Zuckerberg had little choice as to whether an IPO had to be done at once. To ensure that early investors would retain control of the company, Facebook in instituted a dual-class stock structure. The roadshow faced a "rough start" initially.
Prior to the official valuation, the target price of the stock steadily increased. Strong demand, especially from retail investors, suggested Facebook could choose a relatively high offering price. The Facebook IPO brought inevitable comparisons with other technology company offerings. Some investors expressed keen interest in Facebook because they felt they had missed out on the massive gains Google saw in the wake of its IPO.
Its PE ratio was 85, despite a decline in both earnings and revenue in the first quarter of A number of commentators argued retrospectively that Facebook had been heavily overvalued because of an illiquid private market on SecondMarket , where trades of stock were minimal and thus pricing unstable. Facebook's aggregate valuation went up from January to April , before plummeting after the IPO in May - but this was in a largely illiquid market, with less than trades each quarter during and Prior to the IPO, several investors set price targets for the company.
Much of Wall Street expressed concerns over what it saw as a high valuation. Citing the price-to-earnings ratio of for , critics stated that the company would have to undergo "almost ridiculous financial growth [for the valuation] to make sense. Writers at TechCrunch expressed similar skepticism, stating, "That's a big multiple to live up to, and [Facebook] will likely need to add bold new revenue streams to justify the mammoth valuation". Early investors themselves were said to express similar skepticism.
Warning signs before the IPO indicated that several such investors were interested in selling their shares of the company. Striking an optimistic tone, The New York Times predicted that the offering would overcome questions about Facebook's difficulties in attracting advertisers to transform the company into a "must-own stock".
Some analysts expressed concern over Facebook's revenue model; namely, its advertising practices. In the immediate build-up to the offering, public interest swelled. Some said it is "as much a cultural phenomenon as it is a business story. Trading was to begin at am Eastern Time on Friday, May 18, The stock struggled to stay above the IPO price for most of the day, forcing underwriters to buy back shares to support the price.
The opening was widely described by the financial press as a disappointment. Despite technical problems and a relatively low closing value, the stock set a new record for trading volume of an IPO million shares. Facebook's share value fell during nine of the next thirteen trading days, posting gains during just four.
Price targets for the new stock ranged considerably. On June 4, seven of fifteen analysts polled by FactSet Research suggested prices above the stock's price, effectively advising a "buy. The IPO had immediate impacts on the stock market. Other technology companies took hits, while the exchanges as a whole saw dampened prices.
Investment firms faced considerable losses due to technical glitches. The IPO impacted both Facebook investors and the company itself. It was said to provide healthy rewards for venture capitalists who finally saw the fruits of their labor. Some suggested implications for companies other than Facebook specifically. The IPO could jeopardize profits for underwriters who face investors skeptical of the technology industry. While expected to provide significant benefits to Nasdaq, the IPO resulted in a strained relationship between Facebook and the exchange.
More than 40 lawsuits were filed regarding the Facebook IPO in the month that followed. Additionally, a class-action lawsuit is being prepared [ by whom? In June , Facebook asked for all the lawsuits to be consolidated into one, because of overlap in their content. Facebook's IPO is now under investigation and has been compared to pump and dump schemes. Before the creation of secondary market exchanges like SecondMarket and SharesPost, shares of private companies had very little liquidity; however, this is no longer the case.
Facebook employees had been finding private buyers to unload their shares as early as , and when SharesPost launched in , early employees started exiting en masse. In interviews with the media, bankers seemed sanguine about the outcome. Morgan's reputation in technology IPOs was "in trouble" after the Facebook offering. But by signing off on an offering price that was too high, or attempting to sell too many shares to the market, Morgan compounded problems, senior editor for CNN Money Stephen Gandel writes.
According to Brad Hintz, an analyst at Sanford Bernstein, "this is something that other banks will be able to use against them when competing for deals. From Wikipedia, the free encyclopedia. Overview of the initial public offering of Meta then known as Facebook, Inc.
The Greenburgh Daily Voice. Retrieved 18 July
Facebook issued million shares at a price of $ This price valued the. According to the rule set by Securities and exchange commission (SEC), from 11 Facebook IPO • Facebook set a price range of $28 to $35 per share for its initial public offering. It also upped the maximum size of its offering to. Case Study: FaceBook IPO. Road Show & Demand. May 3rd: MS discloses initial price; $28 to $