Definition of an IPO
An initial public offering is an operation aimed at allowing the sale of part of the capital of a company (the shares) on the stock markets . It is a very long operation to set up. The IPO is initiated by the shareholders of the company at a general meeting. The English term is IPO, Initial Public Offering .
The motivations for an IPO
– Recovery of part of the funds invested : The former shareholders see their power diluted due to the separation of the capital into a multitude of shares. In return, the sale of part of their shares in the company allows them to recover funds but also to take profits on the previous growth of the company with the sale of their securities.
– Liquidity of securities : The IPO will considerably expand the number of shareholders, which will boost liquidity on the stock , thus allowing former shareholders to be able to adjust their participation in the company.
– Fundraising: The main interest of an IPO is to raise capital to allow the financing of new investment projects. It is a way to finance the growth of the company without going through a bank loan.
– Pooling of risks : The dilution of capital allows former shareholders to reduce their exposure to risks and to pool it with new shareholders.
– Notoriety : An IPO draws the spotlight on the company, which allows the company to be known to many investors (individuals and institutions). In addition, it is often reassuring for investors to see that a company is listed, both financially and commercially.
–Modification of the financing structure : The raising of new funds allows the company to reduce if it wishes its credit risk ( solvency risk ) by repaying part of its debts. It can then subscribe to new bank loans to finance investment projects.
The constraints of an IPO
– Dilution of power : Due to the increase in the number of shareholders (institutional or private), decision-making and control power is diluted. In general, the more shareholders there are, the more power is diluted. The important thing for majority shareholders is therefore to retain power over major company decisions.
– Decreased yield : For former shareholders, the amount of dividends received becomes much less important. Indeed, part of their is sold to other shareholders who receive part of this dividend.
– Cost of introduction : An IPO is expensive for the company. It must first pay for the dissemination of information in various financial newspapers in order to attract new shareholders. Subsequently, the company must pay large commissions, in particular to the banks which are responsible for selling the securities issued to their customers. Finally, any company on the stock market must make annual reports and income statements available to shareholders, which comes at a cost for the company.
The different IPO methods
An initial public offering is centralized by a platform for the purchase / sale of securities . The majority of IPOs can be associated with a guaranteed placement. This means that the banks undertake to find a taker from their customers for all the securities in return for large commissions. Except in the case of a direct listing, at least 10% of the securities must be reserved for individuals. Here are the different methods of introduction centralized by the stock exchange:
– Direct listing : This technique is reserved for companies that want institutional investors only. In direct listing, a minimum price is set. At the time of the listing, the first quotation cannot exceed 10% of this minimum price. Otherwise, the market authorities can decide on the organization of a new issue. The minimum service rate for requests is set at 5%. This method of introduction is used very little.
Direct listing can be combined with guaranteed placement.
– The firm price offer (OPF) : The introductory price is fixed in advance and all requests are treated equally (except if category A has priority, we then say that the OPF is differentiated). The titles are allocated in proportion to demand. If the demand is too strong, a new introduction is carried out with a price at least above 5%. Companies that are privatized use this technique.
The reservation of titles begins one week before the introduction. A price range is then given to investors who decide how many securities they want to acquire. Two days before the introduction, the firm price is disclosed and each investor can then decide whether or not to withdraw his purchase order.
Finally, the next day, investors are made aware of the number of securities they will receive. The distribution is made in proportion to the request. For example, if 100,000 shares are issued and 500,000 shares are subscribed, then the service rate will be 20% (100,000 / 500,000). Thus, an investor who has reserved 100 shares will receive 20 shares upon introduction (100 * 20%). It is therefore advisable to inflate your request. The minimum service rate for requests is set at 1%. The firm price offer may be combined with a guaranteed placement.
– The minimum price offer (OPM) : Before the IPO, a minimum price is set and no IPO subscription order may be lower than this price. However, there is no price limit. Each investor can offer the price he wishes as long as it is higher than the minimum price. The operation is therefore close to an auction system. Subsequently, depending on demand, a price range is determined within which orders are served. For example, between Rs. 10 and 15 the orders are not served, between Rs. 15 and 20 the service rate is 30% and between Rs. 20 and 25 the service rate of 70%. Beyond that, the orders are not taken into account.
The final price (IPO price) is therefore set according to demand. In a minimum price offer, the introductory price corresponds to the lower limit of the last range served. If we take our example, the last fork served is between Rs. 15 and 20 . The first quotation will therefore be set at Rs. 15.
This type of introduction is therefore dangerous. The investor must know how to assess with the greatest possible accuracy the real value of the company and therefore of a share. In an OPM, the orders are heterogeneous and known at the last moment, just before the introduction. The minimum service rate for requests is set at 5% if the price is within the chosen range.
It is advisable to place several limit orders gradually increasing the price. Indeed, the orders which go out of the range are eliminated and the investor is therefore served only for those which are included in it.
– Open price offer (OPO) : This is the most recent and widely used method. It combines the technique of an OPF (firm price offer) and an OPM (minimum price offer). The investor must give a global amount for his offer. The price is not known in advance and like an OPM, the various investor demands are volatile. Subsequently, the final price is set according to demand, by comparing purchase orders and the number of securities available. Only orders that are higher than the IPO price are served.
It is advisable to place several limit orders while gradually increasing the price. Orders with a price lower than the final price are not served.