An IPO in M&A stands for an “initial public offering” for a company’s shares or owners. It is an important event for the company as it marks their graduation from being privately owned to having shares traded on the open market. Fintalent’s IPO consultants note that the process typically represents a passage of the company’s assets to investors and often involves some degree of planning by management and due diligence, particularly with regard to regulatory oversight requirements, and so it can be costly in terms of time and money.
There is also a general expectation that the financial market should benefit from the IPO process, and so investors will often closely scrutinize a company’s financial performance in order to determine whether it has produced a sufficient level of profit.
During the months leading up to the IPO, the company will disclose its financial statements as they are prepared to keep investors informed of its prospects. A registration statement must be filed with federal regulators as well as with state regulators in several states in which the company is incorporated. This means that when an IPO occurs on one exchange, it is simultaneously occurring on several others, and so this gives authorities additional time to consider the information before it hits the public domain.
After the IPO is launched, the company will be listed as a new entry on major indexes, and since its shares can then be freely traded by investors, this means that its price will fluctuate directly in relation to supply and demand. This process acts as an ongoing measure of the company’s performance according to the prevailing conditions in its industry.
The IPO is not just a financial event though: it represents an important milestone for management. It will show them that they are now operating within a different set of procedures and regulations from those used during their time as a privately-owned entity. Being involved with public markets is often an important test of a company’s ability to adapt and to manage its own performance.
Some of these steps can come as a surprise, though – for example, since the bulk of a company’s finances are not visible during private ownership, managers might not be aware that a positive year-end profit does not always mean that their company has been profitable. However, this process is unlikely to be particularly dramatic: it is unlikely that a newly listed stock will suddenly perform extremely well or decline very quickly.
The IPO process can be expensive and time-consuming, but it is usually considered to be an important inclusion in a company’s career. It is not uncommon for successful CEOs to take part in their companies being traded on the stock market. This is likely based on the belief that this will help them to identify with their investors as well as with future outside managers, who need to understand how companies should operate if they are to assess whether they are a good potential client.
A further purpose of the IPO might be related to the desire of management – particularly those at an early stage of a company’s life – to make their shareholdings accessible for sale or exchange later. This will require the company to go through the IPO process in order to be listed on a stock market. There are several reasons why executives might choose this route:
An alternative way of becoming a publicly traded company is for private equity investors (who are already on the stock market) to take over an existing company and sell shares in order to raise funds for future expansion or other investments. While this gives a company the benefit of being publicly traded without having to undergo the IPO process, it therefore means that the current owners are selling their stock.
The process by which companies become publicly traded is known as “going ex-dividend”, and so the sale of ex-dividend shares will not impact the company’s share price and so can be used as a way of providing an independent valuation without relying on current financial results.
With respect to a particularly large company that is often involved in many industries, it might be difficult for outsiders to see what benefits might come from an IPO. This could mean that being listed on a stock market could seem like a distant future prospect, but this could still be useful if the benefits are especially important to the company’s growth and therefore potentially worth waiting for.
There are also significant differences between common stock and ex-dividend shares.
In the United States, the abbreviated form for an Initial Public Offering is “IPO” (although this term is also used to describe a follow-on offering of stock). In Latin America, the acronym used to be “PBI” (“Panama Stock Exchange”), but now it is commonly referred to as IPO. In Canada, there are two forms of initial public offering. The more common variety of initial public offering refers to the listing of a new stock on a stock market exchange, such as the NYSE or TSX. This type of IPO is often referred to by companies as their IPO or IPOS. The second type of listing is referred to as a pre-IPO. Most companies will not conduct a complete IPO because they do not have sufficient shareholders who are willing to purchase the new shares. A pre-IPO, therefore, allows companies to raise capital in the form of stock without having to go through an IPO. Pre-IPOs may be structured as private placements where only certain shareholders can participate and/or public placements where all shareholders are free to participate. Pre-IPOs are also sometimes referred to as reverse or American IPOs or American printings (“Boston» Type” has been used for this term).
In the United States, an IPO is subject to certain requirements or exemptions, specifically Section 4(a) of the Securities Act of 1933, as amended and Section 10(a) of the Securities Exchange Act of 1934. Certain listed companies are exempt from filing reports with the SEC but still must adhere to all other SEC requirements. The rules for Underwriters can be found in Rule 10b-18 under Regulation A and Rule 154 under Regulation D. These rules require that all underwriters be registered with the SEC or be subject to registration if their activities exceed $1 million per year. Usually, there is a minimum percentage of the offering that must be allocated to an Underwriter by way of commission. In addition, if an issuer proposes to have more than five underwriters, it must file a Form A-1 with the SEC which contains a description of its activities and the names of its underwriting clients. The rule states: “The information in A-1 shall be provided in any case where there is no registered market maker or where there are not more than five purchasers”. Rule 154 requires that investors receive annual reports detailing the activities and performance of all underwriters.
Selling shares is called “going ex-dividend”. This happens when the stock trades without the dividend. The company’s board of directors determines a record date, usually two business days before the shares are sold. Any shareholder who owns stock as of that date is entitled to a dividend payment.
In many jurisdictions, shares must be held for a certain period of time before they can be sold, known as “locked-in” or “settlement” periods. In Australia, this is called a securities exchange control. Once these periods end (for example 3 months after the record date in Australia), then shareholders may sell their stock on the ex-dividend date.