Initial Public Stock Offering Process in 1965: Looking Back on the Past

IPO Stock Process

Seventy percent of the human body is composed of water. Thus, every human being needs water for life support. There are many incidents wherein individuals survived for several weeks by just drinking water.

Trees and plants need sunlight to complete their photosynthesis or their food-making process. In addition, it is also an essential element for their growth. Without sunlight, their chance of survival is very slim even when they are supported with water and necessary soil nutrients.

In the same manner, companies need capital or financial assets to support their day-to-day business operation. They need to pay the suppliers of the raw materials that they are using to manufacture their products. They need to pay their employees who helps the company manages its operation. Advertising and other PR stuffs also needs financial support in order to promote their products to the public.

Thus, capital for all companies serves as their “bloodlines”. Without it, no business operation, and definitely, no generated revenue for the company.

Companies can raise additional capitals that they need to support their business operation as well as possible expansions in various ways. However, one of the more popular ways to raise capital for a company is the IPO or the initial public offering. It is referred to as the first sale of a company’s common shares to interested public investors. As previously mentioned, it is primarily used to raise additional capital for the company. Keep in mind that this term only refers to the first public issuance of a company’s common stocks. Any later issuance of common shares to interested public investors is now referred to as a secondary market offering.

Initial public offering of common stocks has proven to be an effective way of raising additional capital for a company, though there are legal compliances and reporting requirements that must be met. The United States is considered to be imposing heavy legal requirements to those companies that will file an IPO for additional capital generation. Under the Federal Law, all IPO process are governed by the Securities Act of 1993 and laws of the U.S. Securities and Exchange Commission, with each stock exchange has its separate respective rules that every company must follow.

The IPO process generally includes one or more investment banks (financial entities that assist both public and private companies or corporations in raising capital as well as provide strategic advisory services for acquisitions, mergers, and other kinds of financial transactions) as the underwriters. The company will enter a contract with the underwriter to facilitate the issuance of the stocks to the public. The underwriters will be the one to approach investors who are interested in buying those common stocks.

During the early years of the IPO, it is considered to produce a positive mean initial return to the listing companies. In 1965 when the IPO process is still on its first years of operation, there are around 120 companies listed which generates an average initial return of 11.4 percent from the issuance date to the end of the offering month.

IPO analysts recorded an average of 22 percent worth of initial returns on the listed companies from 1965 to 2004. It clearly shows that many investors are interested on purchasing shares through the IPO process. It also illustrates that companies under IPO listing generally provides an additional capital for them.

The initial public offering of common stock during the 1965 era is just a manifestation that the IPO process, despite of the heavy legal requirements that must be made, it is still the most ideal way to issue stocks to the public and raise additional capital for a company’s day-to-day business operation.


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Initial Public Offering Costs: Beyond the Limelight

IPO Cost

In business, profits always come with costs.

For instance, if you own a homemade ham business, you need to spend for the raw materials (raw meat, different spices, and packaging) and for the marketing of your homemade ham (renting a stall in the meat section of a market) before you will be able to receive your profits out of the products that you have sold. In other words, if you will not spend initially on something, there is no chance that you will generate any profits later on.

In business, costs are defined as the amount of money that you need to use to acquire something. Whether you have homemade ham business or trading foreign currencies for a profit, you need to spend some amount of money to acquire or produce a particular product and later sell it on a price which will yield to profit. That is what is referred by most investors as the cost.

What are the common expenditures that every company must address? These are, but not limited to, the following:

• Production costs (includes raw materials, machine maintenance if there is any, electricity, crude oil used for machines, and others);

• Maintenance cost (includes maintenance on the facilities such as the manufacturing plant, business office, machineries, automobiles for deliveries, and others);

• Personnel cost (manufacturing plant workers, office personnel, delivery personnel, and retailers);

• Advertising (public relations, print and broadcast media advertising, Internet advertising, and others); and

• Other operation-related miscellaneous expenses.

Another cost-oriented element that a company may incur is raising additional capital to sustain growth in production or possible business expansion. One of the methods used in raising additional finances for a company, which is the IPO or the initial public offering, requires you to prepare thousand of dollars along the process just to sell the common shares that you issued to the public.

What are the actual costs that you may incur when your company will undergo the IPO process?

Initial public offering is the first sale of a company’s common shares to the public. It involves several investment banks that will serve as the underwriters for the process. The issuer or the company that will sell their common shares will enter an agreement with the lead underwriter to sell such shares to interested public investor. The underwriter, in return will offer the shares to investors who want to purchase it for a price.

Along the IPO process, you will definitely incur costs, which is dependent on the stage of the process. For instance, one of the stages within the IPO process is the completion of disclosure documents, which is vital in convincing investors with regards to the viability of your IPO. The absence of any well-defined business plan that you need to present to the investors will yield to difficulty in answering the disclosure document questions. In most cases, the business plan will run for about 25 to 100 pages, and may cost you around $5,000 to $20,000 on just a single stage alone.

If you will sum it, a typical business firm may spend as much as $750,000 worth of direct costs related to an IPO process. Take note that it does not yet include the indirect costs such as the management time spent on the IPO, the disruption of the operation while the company is under IPO, and a good team of IPO planners—consultants, underwriters, lawyers, and specialists.

It is really costly to go on IPO. So the next time you plan to sell the common shares of your company make sure that you have enough funds that will shoulder the costs related to your initial public offering process.


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Where Is the Capital? Why Don’t You Go On Initial Public Offering?

IPO

Google, the search engine giant.

Rosneft, Ireland’s state-owned oil giant.

Netscape Communications Corporation, one of the software program manufacturer giants.

Aside from the descriptive word “giant” which refers to their well-established corporate system in their respective industries, these three companies have something in common, together with other large business entities around the world.

They went public through the IPO or the initial public offering.

For individuals who are not avid fans of the issues and other whereabouts circling around the business and investment community, initial public offering does not make sense at all. However, for most corporate entities who want to pursue expansion of their operation as well as providing additional services to the public, initial public offering is an important matter for them.

In finance, IPO or the initial public offering is the first issuance of a company’s common shares to interested public investors. The term “common shares” generally refers to the stocks that are consistently purchased and sold in the market. Take note that common shares are only a percentage of the total shares of a certain company or corporation, thus the majority of its shares are still within the owner/s of such company or corporation and will not be a subject for distribution to the public.

The principal purpose of a company to “go public” (another term for undergoing the IPO process) is to raise capital for the company or corporation. In other words, IPO is one of possible ways where a company or a corporation can raise capital which can be used either for additional support to its day-to-day operation or for business expansion purposes. However, any companies or corporations that will undergo the IPO process are obliged to follow heavy legal compliances and other necessary requirements.

The procedure works just like of a regular auction process. It generally involves several investment banks that will serve as the underwriters for the process. In finance, underwriters are the ones assessing the background of the companies involved in the process preceding the issuance and distribution of common shares to the public. The company or corporation that decided to go on public (or the issuer) will enter an agreement with a lead underwriter to sell the common shares to the public. The underwriter meanwhile approaches various investors who are interested in purchasing any common shares for sale.

In case of large IPO process (which involves large corporate organizations), it is typically underwritten by a syndicate (a group of investment banks dealing with a single company) that is led by a major investment bank which is the lead underwriter. Once the common shares have been distributed to the investors, the underwriters are paid through commissions that are based on the percentage of the value of the common shares they sold. In most cases, the lead underwriters take out the highest commission, with around 8 percent.

For multinational companies that will undergo initial public offering, the process may involve two or three syndicates to deal with various legal requirements in its home country and other countries as well. In addition, because of the heavy legal compliances that must be met, IPO process usually involves two or more law firms that have major practices on securities law.

Initial public offering is important for every corporate organization operating around different markets. Despite of the heavy legal requirements, it is still the best way to raise capital for any company or corporation.


Browse IPO
Initial Public Offering Tips


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Initial Public Offering Costs: Beyond the Limelight
Initial Public Stock Offering Process in 1965: Looking Back on the Past
Reliable Information on Companies Under Initial Public Offering in Canada Through the World Wide Web
Initial Public Offering Legal Requirements: Undergoing IPO is Not as Easy as You Think
Initial Public Offering Made Netscape the Leading Web Browser Company in the 20th Century