Understanding Initial Public Offerings (IPOs) – Enterprise Edition

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Richmond Kwame Frimpong

Financial WELLNESS with Richmond Kwame Frimpong

Preamble

An Initial Public Offering is the first sale of stock by a private company to the public. Put differently, if a company issues shares to the public for the first time, it is called an Initial Public Offering (IPO). Another way to describe an IPO is “Going Public”.

Prior to an IPO, a company is considered to be private – with a smaller number of shareholders, limited to accredited investors (for instance, the founder, family, and friends). After an IPO, the issuing company/enterprise becomes a publicly listed firm on a recognized stock exchange (like the Ghana Stock Exchange).

Leveraging IPOs

Initial Public Offers (IPOs) introduce new capital into a privately held company and also opens up the organization to a number of opportunities. Examples of such leverages are;

  • IPOs afford companies the opportunity to secure longer-term(patient) capital. The raising of such capital allows for future expansion, growth, and greater ability to stand competition.
  • IPOs increase scrutiny and gives public companies competitive rates compared to debt.
  • IPOs raise the level of the investing public’s awareness of the company and its products/services. This for example results in greater ability to attract high-caliber employees, as well as potential clients and increased general business opportunities.
  • Given market demand, a public company can always issue more shares. This makes it easier for companies to take advantage of mergers and acquisitions that come their way because equity can be issued as part of the deal.
  • IPOs result in trading of the company’s listed equity on the stock market. This makes it possible to implement things like employee stock ownership plans, which help to attract top talent.
  • IPOs enable companies broaden their investor base(shareholders) and provide liquidity for same.

Potential Downsides of IPOs

The advantages of “Going Public” as discussed above far outweigh its downsides. Even in instances where a company cites any potential downside, the sponsoring broker or underwriting company can advise and manage the same for a positive outcome.

  • The biggest potential downside however to going public is often the loss of control over the company for management and founders/investors. Once a company is public, managers will be required to meet quarterly earnings estimates of research analysts and shareholders.
  • The Securities and Exchange Commission (SEC) requires public companies to sometimes make public sensitive information when they go public and on an ongoing basis in required filings. Such information may include data about products, customers, customer contracts, or management that a private company would not have to reveal. Competitors may take advantage of these disclosures to improve their market share.

 

  • The business owners may not be able to take many shares for themselves. Even if they do, they make not be able to sell the stock at the price and time they wish to if at all. Even when that is not the case, they could hurt the stock price if they start selling large blocks. Investors may see it as a lack of confidence on their part. Also, in very rare instances, a group of dissident investors could potentially obtain majority control and wrangle control of the company.

What to do as a Company to go Public

When a company wants to go public, the first thing it does is hire the services of a “Sponsoring Broker”. Aside from the appointment or hiring of the services of a sponsoring broker; there is an array of factors to consider before deciding to “Go Public”.

These factors include meeting certain financial qualifications set by the various exchanges (in the case of Ghana; the Ghana Stock Exchange), the appropriateness of an IPO strategy for your business and business goals, and the market receptivity to IPOs generally and within your particular sector, among others.

If your company meets these financial requirements, business goals, and the market conditions, then it’s time to begin the IPO process. Typically, it takes four to eight months to complete this process, from the time you actively engage underwriters to the time you close the offering.

Seek Help

If you currently do not have a financial adviser who can assist you with going public as a business, you may want to contact one immediately to discuss capital raising.

You may send comments, questions or suggestions if any to [email protected] and @richmondkwamefrimpong across all social media platforms

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