Participation in stock exchange transactions is the dream of most developing companies. The procedure gives them a lot of advantages: from increased status to increased liquidity of assets. To successfully promote any business, raising capital is required. Initially, organizations resort to the possibility of obtaining bank loans and independently look for investors. Often these activities are not enough for the successful development of the enterprise.
Therefore, there is a need for additional investment in the organization. You can issue more bills or get a loan from a bank. But such actions are not always successful. The best option for raising funds is to place and sell bills on a stock exchange or IPO.
This procedure will automatically attract potential buyers and multi-million dollar investments. We will tell you about the specified exchange transaction, its features, and advantages.
Ipo what is it
The event is aimed at promoting and developing a business structure by attracting additional funds that appear through the issuance and sale of promissory notes of a commercial enterprise or organization on the stock exchange. Decoding Ipo
abbreviations – Initial Public Offering. During the implementation of the event, the status of the commercial enterprise changes and it becomes public, i.e. Anyone participating in exchange activities can become its shareholder.
What is ipo in simple words -
is the issue and placement of shares on the stock exchange to attract investors. It is guaranteed that a significant portion of market participants will pay attention to this event, and a certain number will invest their money by purchasing shares.
To carry out this exchange manipulation, intermediaries (financial consultants) are hired for promotion and trading. These include: underwriters, brokers, auditors, special legal services. The main role is played by underwriters - these are investment bankers (representing large financial institutions). They conduct marketing, evaluate assets, attract potential buyers, collect and accumulate the first applications for the purchase of bonds.
What is the main purpose of an IPO?
As stated above - attract the maximum amount of investment from outside to develop the business.
At the same time, it is possible to recruit qualified personnel to the staff of the enterprise. Securities will partially cover a certain part of the costs of concluding transactions. Thanks to the placement of shares, the organization will become more famous in the global business environment. Answering the question - what is an IPO in simple words,
we can summarize it - attracting large additional investments for development with minimal risks for the issuer.
Examples
Over the past 15 years, the American public company market has lost more than half of its participants. Many IT companies do not want to go public and operate quite successfully without an IPO. Since 1999, when almost 400 technology businesses were listed, the number of such companies has decreased by almost 40 times.
Successful and unsuccessful IPOs
It is very difficult to identify specific criteria to say whether going public was successful or not. Not always with a positive result at first we get a successful completion. We are talking about failed listings.
For example, Toys "R" Us (an American company selling children's toys), when trying to place its shares, collected a colossal amount at the very beginning, but failed miserably, unable to cope with the volume of work. The chain eventually declared bankruptcy in 2018.
The IPO of a Russian diamond mining company ended with success. In 2013, its shares were placed on the Moscow Exchange for the first time - the largest event in the history of the Moscow Exchange. The papers began to be sold at a price of 35 rubles apiece. The growth continues to this day: today the share is trading at 95 rubles.
The largest IPOs in Russia and in the world
The most expensive IPOs in the world:
- Chinese public company Alibaba Group (2014, $25 billion);
- one of the largest banks in China, Agricultural Bank of China (2010, $21.1 billion;
- multinational payment services company VISA, Inc. (2008, $19.7 billion);
- social network Facebook (2012, $18.4 billion).
In Russia, the largest IPOs were:
- Mal.ru Group (2010, $1 billion);
- Yandex (2011, $1.3 billion);
- Megafon (2013, $1 billion);
- Tinkoff Bank (2013, $1.1 billion).
What else is ipo useful for?
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The investment operation allows not only to attract additional finance, but also to achieve some other advantages. In the process of implementing this procedure, the issuer receives the following benefits:
- placement of securities opens up new financial prospects and opportunities. You can attract significant funds from outside, which cannot be obtained directly by contacting banking institutions;
- thanks to control by exchange regulators (agencies), the company’s shares acquire a higher rating;
- when there is high demand for stock exchange bonds, it becomes possible to issue additional securities;
- the process of acquisition or merger can be facilitated thanks to shares;
- trading in securities signals the availability of liquid funds and assets of the organization.
About
Stages of IPO implementation
Once the decision to issue bonds has been made, you need to be prepared to carry out a number of activities. IPo is implemented according to the following formula:
- Preliminary.
During it, the structure of assets and corporate governance, efficiency and financial situation are assessed. It is important to calculate at what estimated cost to issue securities, in what quantity, and to indicate the future capitalization of the enterprise. It is necessary to understand the degree of information and financial transparency, which will attract investors, ensuring a high level of trust on their part. The preliminary period can take from six months to several years. - Preparatory.
An investment memorandum for potential partners is being developed, an underwriter and a stock exchange are being selected where the securities will be placed. Documents are prepared and submitted to the official regulator, in Russia this is the Central Bank of the Russian Federation. The investment banker evaluates the issuer's assets and determines the parameters of the future IPO. He is also preparing the memorandum. The document includes information about the company, its financial statements, management, and dividend policy. In turn, a commercial organization is obliged to justify why it plans to raise additional funds. If the investment memorandum is approved, a date is set for the event and advertising is carried out in order to increase interest on the part of potential bond purchasers. Representatives of the company hold meetings with future buyers of shares, outlining the advantages, disclosing financial indicators, and the level of liquidity. - Main. The underwriter draws up an order book, where he enters investors even before the start of official trading. Based on the collected purchase offers, the value of the securities and their quantity are determined. The investment banker has priority rights to purchase shares prior to the IPO. Therefore, these “exchange players” have an interest in conducting an effective IPO by investing money in a profitable business.
- Final. Securities begin trading on the stock exchange after official approval (listing). The first trades will show how in demand the securities are and whether the IPO was effective. When the price of shares corresponds to market realities, the issuer can build a positive reputation among investors, with a subsequent increase in capitalization.
About
What will overheating lead to?
An IPO is the “canary in the mine” of the stock market, says Anton Barinov. “The faster the number of transactions grows and the stronger they “shoot” at the beginning of trading, the more overheated the market is,” he is convinced. “The market is overheated. But it is overheated not because investors are stupid, but because in the modern financial world there are no alternatives to shares, says Barinov. — Interest rates are so low that bond yields are not much different from zero, especially taking into account inflation. And the precious metals market is too small and speculative to compete with stocks.”
In certain companies, signs of overheating can be observed, Duisembayeva believes . For example, the capitalization of the cloud company Snowflake is about $100 billion, with a target market size of only $80 billion.
The share of new Ozon investors after the IPO exceeded 18%
Overheated markets are very sensitive to fluctuations in liquidity, Losev warns. If monetary support decreases and money begins to flow into the real economy, then the “bubble” in the stock market will burst, Losev warns, but this is not a matter of the near future. Anton Zatolokin, head of the market analysis department at Otkritie Broker, believes that there is no need to expect a tightening of monetary policy in the next two years.
The high valuation of companies that are now going public is also due to the past shortage of supply of such stories, says Alfa Capital portfolio manager Eduard Kharin. But as more companies enter the market, their valuations may decline somewhat. Barinov believes that one should not expect a significant drop in the stock market - a correction of 10% is possible in order to “let off steam” and then continue to grow with renewed vigor.
What other advantages are there when conducting IPO?
First of all, the company saves itself from the process of searching for financial sources in the business environment, which is not always successful. The issuer that issued the securities receives:
- the ability to correctly assess the market value of a business;
- receives tools to improve the efficiency of ongoing business activities, including through transparency of activities;
- there is the possibility of implementing broad diversification;
There is a possibility of using the issued shares to settle transactions and pay bonuses to your employees at the end of the year.
Advantages and disadvantages of IPO for investors
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Placing bills of exchange from developing commercial market entities certainly attracts potential partners. The event is beneficial for investors. The main advantage is that it becomes possible to buy the assets of a promising enterprise or organization, which means it is a profitable investment. Anyone can purchase the issuer's securities if they have the required amount, regardless of their relationship with the company's management. Often such an investment promises decent dividends.
Any stock exchange event has its nuances. There are also disadvantages for investors participating in IPOs. These are risks associated with the value of the issuer's bonds. Often after their purchase, their price does not rise, and sometimes even falls. There are many examples of unsuccessful IPO. So “Xiomi” in 2022. placed its bonds at 17.6 Hong Kong dollars, and after 24 months their value fell to 12.7 dollars. Facebook shares were issued at $38, but after the start of trading they fell by 20%, returning to their original values only two years later.
A clear example of an IPO was the sale of VTB Bank bonds, which were initially traded at 38 kopecks per share. In the next two years they fell to 3 kopecks. Now they are trading at a price 2 times less than the initial price.
There are certain restrictions on the participation of investors in trading. Only qualified investors can participate. There is no guarantee that the application will be satisfied in full. The underwriter may ignore it or partially implement it. But there are also high commissions for brokers when concluding a transaction.
About
Why did the boom happen?
The reason for the boom in initial public offerings was cash injections from central banks and governments aimed at combating the recession, says Alexander Losev, CEO of Sputnik Capital Management. According to him, in 2022 this figure reached $15 trillion. According to JPMorgan calculations, the money supply (M2) in the United States this year increased by a record 24%, according to BCS World of Investments analyst Ainur Duysembaeva.
As a result, financial markets overflowed with liquidity, Losev says. According to Duisembayeva, there has been a shift in fair levels of market multipliers. Thus, the market P/E multiplier of the S&P 500 index currently significantly exceeds historical average levels. High market multiples acted as triggers for companies planning IPOs, the analyst says.
“Some weren’t sure if we would survive”: how Airbnb survived the pandemic and holds an IPO
The growth in the attractiveness of technology companies during the pandemic has become important, continues Duisembayeva. According to her, the majority of companies that have successfully offered their shares to investors belong to this sector. Another factor is the increasing accessibility of these IPOs to retail investors, Duisembayeva adds. This factor was especially strong in the so-called hype IPOs, such as Airbnb, Doordash, Snowflake.
Investors are trying to participate directly in the placement of shares, then sell at the start of trading, while the security is rapidly rising in price, states Ganelin from Aton. “The strategy is good, but due to high demand, their applications are usually met in a very small proportion. Buying shares at the opening of trading, when quotes are much higher than the offering price, is risky,” he says.
How to participate in an IPO as an investor
The issuer's securities put up for auction are purchased by the largest financial organizations or funds. It can be difficult for a private investor to get into the order book even before the opening of trading. To make this happen, you need to take several steps:
- Officially obtain the status of a qualified investor.
- Open an account with a broker who will provide access to the IPO. This will allow the application to be forwarded to the investment banker.
- Transfer the required amount to participate in the auction to your account to form an application. It can be several hundred dollars to tens of thousands.
You can also use the services of a management company by purchasing bonds from it before the start of trading.
Commissions
In addition, you will still need to pay intermediaries for participation in the IPO (the average commission for purchasing shares in an IPO can be 3-5%): and the commissions, as a rule, will be taken immediately, but whether the investor will make a profit is another question.
We do not recommend to our clients the purchase of individual stocks, because this causes disappointment and loss for most investors.
The core of the investment portfolio of the vast majority of retail investors should be index funds.
Participation in an IPO is also the purchase of individual shares, only a much riskier and more expensive undertaking.
Useful tips
For a private investor, it is important to invest capital in bonds on time and correctly. It is recommended not to purchase in the first days of trading. Firstly, future partners most often do not have comprehensive information about the issuer and its assets. All financial indicators that allow us to draw a conclusion about the purchase of bonds are unknown.
You should wait after the start of trading, since by purchasing bills in the first days you may find yourself participating in a “sort of lottery” for new asset owners. Significant price fluctuations can be expected. Leading financial analysts recommend buying bills only after their value has stabilized.
