If you follow the news from the world of finance, business and technology, you probably heard similar wordings: “The company carried out an IPO”, “the concern entered an IPO”, “the company's shares passed the IPO procedure” and the like. It is likely that those who have already met with such information have an approximate idea that we are talking about putting the company's shares at public auction, but they do not think about the details that this process entails. Other people, perhaps, simply skip such information, especially not bothering about this.
For those who would like to learn more about the mysterious three letters that are closely associated with large companies, successful businesses and global exchanges, we are writing this article. In it we will try to fully disclose information on this topic.
What is an IPO?
So, let's start by deciphering those same “three letters”. An IPO in English means such a phrase: “initial public offering”, which translates as “initial public offer”. In simple terms, the procedure is to withdraw the shares of a company to public auction on the stock exchange. Sounds easy, doesn't it? However, such a process has a number of consequences, which we will discuss in this article. After all, it is impossible to answer the question “What is an IPO?” With a few sentences: this process can be an order of magnitude more complicated than it seems.
IPO preparation
So, in order to better understand the essence of the operation to which this article is devoted, we begin with a detailed description of the procedure for preparing the company's shares for their listing on the stock exchange.
In fact, legally bringing a company to an IPO is quite difficult. It is necessary to fully disclose the financial indicators of a legal entity, show all the processes that take place in the company, provide public access to information regarding financial statements. Besides the fact that preparing all this data takes a lot of time and effort, the disclosure of such information can also harm some types of business, as it will quickly become the property of competitors. That's why not everyone is in a hurry to bring their company to IPO.
Also, the question to the owner of the company “What is an IPO?” Should be answered: openness and responsibility. According to the first, we have already specified that all information on business activities will be available. This should also add more information about the owner and founder of the business, about the publicity of his person. In addition, an IPO is a responsibility. Indeed, now a company, among the shareholders of which there could be only trusted people, is becoming public - and everyone can buy its shares. Can you imagine the pressure of a business owner who puts a company on public bidding?
Who is preparing the IPO?
You should also pay attention to who specifically is preparing the company for public listing on the stock exchange. It would seem, why the owner cannot do this? But not so simple. No, theoretically, of course, he can do this, but in practice this can never be found. The preparation of the company for such a crucial event as an IPO is entrusted to specialists who do this on a professional basis and have some experience in this matter. Most often, such activities are carried out by the largest banks, for example, Morgan Stanley. It is quite possible that large audit companies are involved in the preparation, and this practice also exists.
Banks most often prepare for an IPO due to, firstly, their extensive experience in collecting financial statements, working with large amounts of data and organizing them; secondly, due to the possible redemption by such a bank of a portion of the shares of the company that is bidding.In this case, the bank is profitable to prepare for the reason that he can buy the package at a price lower than what it will cost in the future. Of course, the details of such a deal (including the amount of shares that can be bought back) are discussed in the contract.
Where do IPOs go?
So, we discussed what an IPO is and why it is carried out. Now we will consider where exactly the companies are exposed and how they are looking for investors. It should be noted that in the world there are only a few major exchanges - these are New York, London, Moscow, Warsaw and others. The first serves as a platform for the release of American technology companies (Twitter, for example, was put up for auction in New York). Now you understand what an IPO is, Twitter also cannot but know. You see, as you read, you begin to understand this topic more and more!
The second exchange - London, is also a platform for major exits, including the IPO of Russian companies. For example, Rosneft, Lenta, VTB, Megafon were represented in the capital of England.
The Moscow Exchange, according to the logic of things, should serve as a platform for the start of domestic companies, and there are actually such examples. But the practice, alas, is not as widespread as we would like, for the reason that in the Russian Federation there is no such amount of capital that is present in the West. Even Russian companies prefer to keep money in Western banks, and therefore it is more logical to look for investors “there” than “here”.
Benefits of IPO
What is the IPO of the company and where is it conducted, we examined. Now we will try to outline briefly the main advantages that give a business access to the stock exchange.
The first is prestige. Yes, not even additional funds, namely prestige! One of the main “advantages” for which companies agree to enter the open market for public trading in securities is the IPO and SPO procedure (you ask: “What is this?”. IPO and SPO are similar phenomena, only SPO is secondary raising funds from stocks that already belong to investors, it does not affect the total capital of the company).
Secondly, of course, entering the market provides additional capital. If prestige allows us to say "our company is so cool that it entered the London Stock Exchange", then the funds raised are a unique opportunity to make additional investments in the business, expand it, develop new markets and continue to grow.
Thirdly, through an IPO, you can make a company better known in markets where it has not previously been present. A vivid example: the Internet giant from Russia, Yandex, was not known in the West until it went through the public offering process. And we are talking about a technology company, of which there are already a large number of them in the USA! And imagine what is an IPO of a bank for its reputation? Again, an example is VTB, which underwent this procedure and attracted almost $ 8 billion, became more recognizable to Western partners, which positively influenced its activities.
As you can see, the procedure for entering the exchange brings several advantages at once: prestige, additional funds and recognition. Now let's talk about the negative consequences of this procedure.
Negative aspects of IPO
So, let's think again what an IPO is. Every investor can buy stocks of your company. This means that any person, investing in your company, takes its share, getting the opportunity to manage your business. Agree, from this point of view, listing on the stock exchange can be dangerous: if your company is not rated highly enough, they can buy it at a low price and tidy up your business.
In addition to possible control, investors can also obtain financial information that would otherwise be confidential. Again, this will not play into your hands, keep in mind that you will in any case disclose it.
Also, when listing a company on the stock exchange, you should not forget about the possibility of failure - if investors value your business cheaper than you expected, then again you will lose on the sold shares.
That is why the IPO procedure is quite risky, and for the same reason, not all business owners who could enter the stock exchange conduct it.
Examples of the largest IPOs in the world
As examples, we will cite the most successful and largest IPOs in the history of mankind. We take into account all the companies, regardless of their origin: GM (23 billion in 2010); ABC (22.1 billion, 2010); ICBC (21.9 billion, 2006); AIA (20.5 billion in 2010) and VISA INC (19.6 billion in 2008). The acclaimed company Facebook raised 18.4 billion in 2012, Twitter - 14.5 billion in 2013, and Google - 1.6 billion in 2004.
The most high-profile IPOs of Russian companies
Of course, among Russian companies there are no such high-profile and large conclusions on exchanges. The most successful can be called Rosneft (10.6 billion in 2006), followed by: VTB (8 billion, 2007), UC Rusal (2.24 billion, 2010), PIK (1.93 billion in 2007 year).
Problems of Russian companies entering western exchanges
Why do domestic companies show (relatively) such low IPO results? Firstly, Western business has many times more money than Russian, due to the increased purchasing power of the same Americans, for example. Therefore, from this point of view, such companies can be considered more successful than Russian ones. Secondly, companies from the Russian Federation are less known there. And how will an investor from the USA invest in unknown shares?
These are the main reasons, in fact, of course, there are more of them: difficulties in legalizing, attracting partners, “advertising” among investors, and more.
