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ferranted_m5_a1.pptxESTABLISHING AN INITIAL PUBLIC OFFERING
STUDENT:
INSTITUTION:
COURSE:
PROFESSOR:
DATE:
PRESENTATION OUTLINE
INTRODUCTION.
PROCESS OF ESTABLISHING IPO.
REASONS WHY COMPANIES GO PUBLIC.
ACCOUNTING PROCESSES
INFORMATION TO BE AVAILED TO INVESTORS.
DIFFERENCES IN ACCOUNTING PROCESSES FOR MEDIUM SIZED ENTITIES.
CONCERNS THAT COMPANIES SHOULD GUARD AGAINST.
SUMMARY.
REFERENCES.
INTRODUCTION
An initial public offering is a process through which a private company is transformed into a public company.
An IPO is a type of public offering whereby the shares of company are sold to the public through institutional investors for the first time.
Selling stock to the public usually occurs through a securities exchange commission or authority.
An IPO is commonly referred to as ‘going public’.
PROCESS OF ESTABLISHING IPO.
The initial public offering procedures are different in various jurisdictions.
In the U.S IPO procedures are regulated by the Securities exchange commission and the procedure is as follows:
Advance planning.
Retention of underwriters.
Allocation and pricing.
Dutch auction
Quiet period
Delivery of shares
Flipping (Stag profit).
PROCESS OF ESTABLISHING IPO.
Advance planning (Development of Business Plan)
This is a very crucial step to the success of an IPO.
It entails development of a solid corporate governance, establishment of antitakeover defenses among others.
Selection of underwriters.
Underwriters are institutional investors, who offer stock to the public/investors on behalf of the company.
The underwriters will sell shares and keep part of the proceeds as part of their fee (Underwriting spread)
Kick off meeting
This is a meeting of all parties to he Initial public offering
The underwriting spread is usually calculated as a discount of the gross amount of shares sold by the investment institutions.
The components of an underwriting spread include:
Manager’s fee
Underwriting fee
Concession.
The kick off meeting will involve: Auditors, managers, investment institutions/underwriters, accountants and lawyers.
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PROCESS OF ESTABLISHING IPO.
Due diligence
This occurs after the kick off meeting
Lawyers, accountants and the bankers need to do due diligence on the company to ensure everything is in order.
Roadshow (prospectus)
Underwriters interact with the investors to determine how many shares they want and amount they willing to pay for the shares.
Pricing meeting
After determining the amount the investors are willing to buy the shares for, the management and the bankers meet to determine the price.
Due diligence usually entails:
Financial and ta due diligence
IP and legal due diligence
Customer calls.
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PROCESS OF ESTABLISHING IPO.
Allocation
After establishment of the prices, the underwriters will allocate shares to the investment institutions.
These may include hedge funds among other traders.
Trading
After allocation, the deal is done.
Trading can now begin and the public can buy and sell shares.
REASONS WHY COMPANIES GO PUBLIC.
Companies usually go public for the following reasons
To raise capital.
As a strategy for exiting venture capitalists.
As a strategy for acquisition of other
companies.
Liquidity
Going public means selling a stake of the company to the public. This is a good way to raise capital. Money raised from the IPO could be used to acquire infrastructure, in research and development and settlement of debts.
Employees could also sell and liquidate their stock options during the public offering. The rewards are usually very high.
Venture capitalists usually invest in a company and wait for it to grow in value. An IPO is a exit strategy fro these capitalist and a way to make a lot of money. However, some venture capitalists may choose to remain with stake in the company.
Money raised from the IPO could also be used to buy out companies. Another option could be offering shares to companies in order to acquire them.
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REASONS WHY COMPANIES GO PUBLIC.
To attract talent.
Increase company value.
Pride.
Brand equity.
Talent
Offering stock options to employees is another good strategy in attraction of top talent.
If a company is in a good financial health condition and has god future prospects, then going public could make the company attractive. This could raise the value of shares hence raising the net worth of the company.
Going public is also the ultimate goal of most entities. It s a source of pride for the company.
Brand equity is another reason for going public. This is because when a company is listed in the stock exchange, it raises its credibility. Customers therefore have more trust in the company’s products.
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GENERAL ACCOUNTING PROCESSES
Accounting and financial due diligence is usually done after the kick off meeting with all parties to the IPO.
Accounting processes include:
Accounting for assets
Accounting for liabilities
Accounting for equity
GENERAL ACCOUNTING PROCESSES
Assets
Assets are those resources that a company owns that have a potential future economic gain.
They include: inventory, land, buildings, receivables and investments.
Liabilities
These are those obligations that a company has.
They include debts, loans and other payables.
Equity
This is the difference between the assets and liabilities of a company
The amount of shares offered to the public during the IPO is a stake of the company’s equity.
Equity= Assets-Liabilities.
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INFORMATION TO BE AVAILED TO INVESTORS.
Contents of the company memorandum (nature of business, share capital, objectives and details of signatories)
Remuneration of the directors
Underwriting commission
Voting rights and projected dividends
Balance sheet, profit and loss reports
Auditor’s reports
DIFFERENCES IN ACCOUNTING PROCESSES
Accounting policies and processes are procedures that are used in the preparation of a company’s financial statements.
These processes may differ across all companies but must conform to International Financial Reporting Standards.
For instance, a company can report its inventory through either:
LIFO (Last In First Out)
FIFO (First In First Out)
CONCERNS
Disclosure of financial and business information which could be used by competitors.
Loss of control since new shareholders acquire a stake in the company.
The IPO’s also take a lot of time and money which can be quite challenging for small companies
SOLUTIONS
Solutions to competition include formulation of business strategies that enhance the company’s competitive advantage.
Solution to loosing control include development f defenses against hostile takeover such as entertaining 51% of the company’s stake.
It is also crucial to do a lot of advance planning to account for the cost and time lost during the IPO
REFERENCES
Rose, S., Shannon, Goodman, Mark, (2001). "The Shift in Litigation Risks When U.S. Companies Go Public". Transaction Advisors. ISSN 2329-9134.
Gregoriou, Greg, (2006). Initial Public Offerings (IPOs). Butterworth-Heineman, an imprint of Elsevier. ISBN 0-7506-7975-1.
What is an 'Initial Public Offering - IPO‘. Investopedia. Retrieved from, http://www.investopedia.com/terms/i/ipo.asp on 11th May 2017.
