Initial Public Offering (IPO) is the procedure in which a company issues and releases its shares publicly for the first time. In addition, many companies to raise new capital choose to do so through the IPO process to either expand their business activities or their investments (possible and mergers & acquisitions) or to offer their own capital pool to the public.
In 2020 many companies in the world chose to raise capital using the IPO process. US companies such as Tesla and Door Dash raised $5bn and $3,4bn respectively by selling their shares through the IPO process.
by Trust Economics-https://trusteconomics.eu
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Why Companies choose IPO (Equity) to raise capital?
- It is permanent form of capital that the company does not need to pay interest and on maturity date notional as it happens with the issue of debt instrument (i.e., bonds).
- It is flexible form and gives the company the advantage to be more resilient.
- It is preferable to raise capital when the value of the company’s share is at extremely high level.
- It allows the owners of companies that already own the majority share package to acquire capital without changing the percentage of shares of the business they own.
- The companies prefer to use IPO to raise fresh capital when the firm starts to enter from a rapid growth phase to a maturity growth phase where the growth is exceptionally low, so they want before to enter the maturity phase to get fresh capital at the possible maximum share price.
- When there is a physical catastrophe in worldwide level or a worldwide pandemic, many companies do not left equity being retired and they had already buyback.
What investors must check before purchase shares through IPO procedure?
- Investors must be incredibly careful and examine well if the share price of a company that choose to raise capital through IPO is at extremely high level.
- They must examine whether the company needs this capital to expand its production investments or because it wants to serve its debt.
- Examine if the company of IPO issue follows an overdebtness path. Examine the net debt (debt less cash) figure.
- If the EBITA of the company follows a diminishing course, then the company will reinstate buybacks and dividends.
- Check out if as a new investor you will have limited voting rights from the IPO shares, so the CEO of the company does not need these funds to make unnecessary acquisitions of other companies by spreading money just to make their name heard in the market.
- When a company has a significant percentage of debt then the CEO looks at how to increase sales and how to collect the costs and expenses of the company and how to bring new competitive products to market. In this case the capital increase via IPO is worth doing.
