An initial public offering (IPO), also known as “going public,” refers to the first-time offering of a company’s shares on an organized capital market. The IPO is typically managed by a consortium consisting of several investment banks.
An IPO opens up new business opportunities
One of the main reasons for an IPO is to raise new capital for the company by issuing shares. By pooling many small investments from a largely anonymous group of shareholders, a large amount of capital is raised. This capital serves to finance growth and to strengthen the company’s equity base. The equity raised through the stock market is permanently available to the company.
An IPO can also be used to address issues such as business succession and corporate spin-offs. Other motivations include meeting growth-related equity capital needs, reducing the cost of debt (loans) by improving creditworthiness, increasing brand awareness and competitiveness, and enhancing the company’s appeal to employees and executives. In addition, publicly traded companies can continuously raise additional equity capital through capital increases.
The entire economy also benefits from the issuance of shares. After all, strong companies are the foundation for economic prosperity. The equity capital raised through the stock market flows into companies and is used for important investments. This makes companies more competitive, secures jobs, and creates new ones.
An initial public offering must be well prepared
Not every company can simply go public or, as called in technical terms, “list” on the stock exchange. Only stock corporations that meet a series of strict requirements are accepted. A company’s first listing on the stock exchange through the sale of company shares to the public is also known as an “Initial Public Offering” (IPO). The proceeds from the sale are added to the company’s equity. Going public is an important strategic decision for any company. The objectives must be thoroughly planned, and the broader context (e.g. the current market environment) must be considered.
Determining the offering price through the bookbuilding process
When a company is listed on the stock exchange, the price of its shares is determined by supply and demand. However, it is difficult to determine a company’s value if it is not yet listed on the stock exchange. In an initial public offering (IPO), the current owner aims to maximize proceeds, while investors seek the lowest possible purchase price. The bookbuilding process is a method for determining a market-based offering price and offering volume for a new stock market listing: Potential institutional investors make non-binding indications of the volumes they would be willing to purchase within a specific price range. The offering price and volume are then determined based on this hypothetical order book. In contrast, in the fixed-price method, the offering price is determined exclusively by the lead underwriter and the issuer.
