Companies all over the world need liquid assets to start, grow or save their businesses. There are several options for companies to get access to these assets, such as the classical use of revenues or to raise a credit at a bank. But these options are maybe not sufficient enough or limited in time. To reach their goals companies can raise the funds in the capital market through an initial public offering.
Due to the advancing globalization and digitalization companies theoretically can gather money through the IPO from all over the world. As the IPO is considered to be one of the most significant events in the life cycle of companies a profound analysis of the advantages and disadvantages of IPOs is needed to be conducted by the companies.
Table of Contents
1. Introduction
1.1 Statement of the problem
1.2 Approach and goal of this paper
2. Initial Public Offering
2.1 Reasons for IPOs
2.2 Process of the IPO
3. Risks of IPOs
3.1 Costs
3.2 Underpricing
3.3 Reduction in amount of share
3.4 Unfriendly takeover
4. IPOs of Facebook and Twitter
4.1 Facebook
4.2 Twitter
4.3 Conclusion
5. Critical appraisal
5.1 Development of international IPO market
5.2 Alternatives to IPOs
6. Conclusion
Research Objectives and Key Themes
The primary objective of this seminar paper is to analyze the various risks associated with the Initial Public Offering (IPO) process, providing a comprehensive overview from the perspective of the company while evaluating the practical implications through case studies.
- Theoretical foundations of the IPO process and the motivations for going public.
- Detailed identification and classification of financial and operational risks during and after an IPO.
- Comparative analysis of the high-profile IPOs of Facebook and Twitter.
- Evaluation of the international IPO market development and practical alternatives to public offerings.
Excerpt from the Book
3.2 Underpricing
In literature, there are several understandings of the underpricing of IPOs but there exists no consistent definition. Based on the most literature, underpricing can be generally described as the difference between the first price on the secondary market and the issue price of the IPO (Hunger, 2001, p. 1026, Kiener 2001, p. 31). It is a worldwide phenomenon which can be seen on almost every capital market that the issue price of IPOs is below the first trading price on the secondary market. According to empirical studies, the first trading price of IPOs is about 15 -20 % higher than the issue price of the shares on average, although this varies by market and industry over time. By subtracting the trading price from the issue price and multiplying by the amount of offered shares the sum of money can be calculated, which companies loose due to underpricing, also called “money left on the table”. Therewith underpricing can also be counted as indirect or opportunity costs (Geddes, 2003, p. 27). There are a number of reasons and explanatory approaches for underpricing. One of the most recognized theories is the model from Rock which explains underpricing based on information asymmetries of investors. The model states that investors have different information about the fair value of shares. While uninformed investors subscribe to every IPO, informed investors only buy new shares, if the issue price is less than the fair value. This causes a "winner's curse" for uninformed investors. To keep the uninformed investors participating in the new issue market and to prevent a collapse of the market, the uninformed investors will be offered a discount to compensate them for the too high purchased shares (Rock, 1986, pp. 188 – 193).
Summary of Chapters
1. Introduction: This chapter defines the necessity of liquid assets for company growth and outlines the research scope, focusing on the inherent risks of the IPO process.
2. Initial Public Offering: It details the motivations for companies to go public and provides a structured overview of the multi-phase IPO execution process.
3. Risks of IPOs: This section investigates the financial, operational, and structural risks, including direct costs, underpricing, loss of control, and hostile takeovers.
4. IPOs of Facebook and Twitter: A comparative case study analysis illustrating the differing post-IPO performance outcomes of Facebook and Twitter.
5. Critical appraisal: This chapter contextualizes IPOs within global market trends and discusses alternative financing strategies available to companies.
6. Conclusion: A final synthesis emphasizing that while IPOs present significant risks, thorough preparation can mitigate negative outcomes in the long term.
Keywords
Initial Public Offering, IPO, Underpricing, Capital Market, Equity, Investment Bank, Prospectus, Roadshow, Financial Risk, Shareholder, Hostile Takeover, Facebook, Twitter, Global IPO Market, Corporate Finance
Frequently Asked Questions
What is the core focus of this paper?
The paper focuses on identifying and analyzing the various risks that companies encounter during and after the Initial Public Offering (IPO) process.
What are the primary thematic areas covered?
The work covers IPO definitions, the stages of the IPO process, specific financial and operational risks, comparative case studies, and alternatives to going public.
What is the main goal of the research?
The goal is to provide a comprehensive overview of the IPO process and its associated risks, helping companies balance the benefits against potential hazards.
Which scientific methodology is applied?
The paper utilizes a literature-based theoretical approach combined with a qualitative case study analysis of Facebook and Twitter to illustrate practical IPO outcomes.
What topics are discussed in the main body of the text?
The main body examines the theoretical benefits of IPOs, the distinct phases of execution, specific risks such as underpricing and loss of control, and an appraisal of global market developments.
Which keywords best characterize this work?
Key terms include Initial Public Offering, Underpricing, Capital Market, Financial Risk, and Corporate Finance.
How does the author define the "winner's curse" in the context of IPOs?
The winner's curse describes a scenario where uninformed investors receive shares in an IPO that might be overpriced, while informed investors only participate if the shares are undervalued, leading to a market disadvantage for the uninformed.
What does the case study of Facebook and Twitter reveal about long-term success?
The study reveals that an initial perception of a "failed" or "successful" IPO does not necessarily dictate the long-term stock price performance, as seen in the subsequent recovery of Facebook's valuation.
- Quote paper
- Tim Meierkord (Author), 2016, Risks during the IPO Process, Munich, GRIN Verlag, https://www.grin.com/document/349158
