Initial Public Offering Paper

Initial Public Offering Paper

Initial Public Offering

In this paper the questions regarding a businesses decision to go public will be addressed. Recent changes such as Sarbanes-Oxley governance ruling have had significant impact on the planning and execution of IPO's however, going public still remains the best route to additional capital for a company. We will also take a look at Google's successful rollout of their public offering. However first we need to look at what it takes for a company to go public. In the text of the Fundamentals of Corporate Finance the initial description of IPO succinctly captures the essence of need and subsequent process of an IPO.

Firms issue shares of common stock to the public when they need to raise money. They typically engage investment banking firms such as Merrill Lynch or Goldman Sachs to help them market these shares. Sales of new stock by the firm are said to occur in the primary market. There are two types of primary market issues. In an initial public offering, or IPO, a company that has been privately owned sells stock to the public for the first time. Some IPO's have proved very popular with investors. (Brealey, Myers, and Marcus, 2004)

In his online article Martin Mannion aptly describes some of the thoughts and considerations of the IPO.

It's also easy for founders to think of the IPO as an end in itself. It can be a final liquidity event for the entrepreneurs who choose to reap the rewards and move on, and it's a typical exit route for funding partners such as venture capitalists and private-equity firms. However, an IPO is simply Day One of the rest of the company's existence, and founders who still run the firms they've taken public know all too well how critical it is to be completely prepared for the offering and for the days long after the ticker tape has settled. They also have firm opinions on the characteristics of the investing partners best suited to help growing companies go public. (Mannion, 2003)

So what steps are necessary for a company to go forward with an IPO? The Investors Guide web site has done an excellent job of providing an abridged version, breaking down this complex process into palatable paragraph

If a corporation decides that it is going to perform an IPO, it will first hire an investment bank to facilitate the sale of its shares to the public. This process is commonly called "underwriting"; the bank's role as the underwriter varies according to the method of underwriting agreed upon, but its primary function remains the same. In accordance with the Securities Act of 1933, the corporation will file a registration statement with the Securities and Exchange Commission (SEC). The registration statement must fully disclose all material information to the SEC, including a description of the corporation, detailed financial statements, biographical information on insiders, and the number of shares owned by each insider. After filing, the corporation must wait for the SEC to investigate the registration statement and approve of the full disclosure. During this period while the SEC investigates the corporation's filings, the underwriter will try to increase demand for the corporation's stock. Many investment banks will print "tombstone" advertisements that offer "bare-bones" information to prospective investors. The underwriter will also issue a preliminary prospectus, or "red herring", to potential investors. These red herrings include much of the information contained in the registration statement, but are incomplete and subject to change. An official summary of the corporation, or prospectus, must be issued either before or along with the actual stock offering. After the SEC approves of the corporation's full disclosure, the corporation and the underwriter decide on the price and date of the IPO; the IPO is then conducted on the determined date. IPOs are sometimes postponed or even withdrawn in poor market conditions. (Investors Guide, 2006)

A small business to pay anywhere from $50,000 and $250,000 to prepare and publicize an Initial Public Offering. The most common known direct