What is an IPO and what role do investment bankers play in the IPO process?


 
What is an IPO and what role do investment bankers play in the IPO process?

Initial public offering (IPO) is a process through which the promoters of the company raise money for pre-defined reasons. The pre-defined reasons can be expansion of the company, paying off old debts, paying off venture capitalists and private investors, bank loans are too expensive or simply raising a huge amount of capital quickly for working capital requirements.

 In an IPO the shares of a company are sold to institutional investors as well as retail investors. This improves the liquidity position of a company since shares listed on a stock exchange can be traded freely.

The IPO is a tedious task for a company and therefore it hires one or more investment banks to aid in this time. The investment banks have prior experience and have departments that cater specifically on raising funds for companies. Some of the well known investment banks are Goldman Sachs, JP Morgan Chase, Barclays and Morgan Stanley.

Role of an Investment Bank:-

  1. Prospectus: A prospectus is a document that contains detailed information about the company. The typical contents would include summary, risk factors, industry comparison, objective of raising money, pre-existant capital structure , financial data, management team, business and any pending legal matters. An Investment Banker will help a company to prepare this prospectus so that no material detail is hidden from the investors.
  2. Roadshows: A financial roadshow is a series of events and meetings happening in different cities for interaction between the top executives of a company and the current and potential investors. In these roadshows the underwriters i.e. the investment bankers showcase a presentation to the investors for purchase of shares in the company's upcoming IPO.
  3. Book building: With the help of the roadshows the IB executives come to know about the interest of the investors and are thereby able to guage how many shares will the company be able to sell on the IPO date. This process is called book building. The investment banker pays utmost important to this as he wants the IPO to be fully subscribed.
  4. IPO price: After the book building process, the investment bankers come to a final price at which the shares should be sold by analyzing orders of different investors. This estimated price is the highest price of shares at which all the shares offered will be subscibed. This is a very crucial stage in the IPO process as non subscription will hurt the repute of the involved investment banks.
  5. IPO assistance: The initial investors are usually the friends and business partners but the investment banks also help by asking their existing clients who are institutional investors or high net worth individuals to subscribe to the company's IPO. These existing clients may be using any kind of service from the investment banks.
  6. Avoid broken deal: Once the stocks of a company have gone public by getting listed on the stock exchange, it is the investment bankers responsibility to not let the stock price of the company fall below the initial price offered. If that happens it represents that the investment bank did not price the stock right and leads to a broken deal wherein the reputation of the company as well as the investment bank is hindered. In some cases the investment banks themselves purchase the stocks of the company to keep the stock price above the initial price.

 Thanks for reading!
Please comment on any financial query you had like me to address. I will try to post something worthwhile. 

Coming up Next: What is the future of marketing and how company's will know your needs before even you know it?

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