The process of an Initial Public Offering. Objectives and motives for an IPO


Term Paper, 2019

18 Pages, Grade: 1,3


Excerpt

Table of Contents

List of Abbreviations

List of Figures

List of Tables

1 Introduction

2 Objectives and motives for an IPO
2.1 Company-related motives
2.2 Owner-related motives

3 Overview of an IPO process

4 Risks during and after an IPO

5 Conclusion

Bibliography

List of Abbreviations

Approx. Approximately

e.g. for example

IPO Initial Public Offering

IR Investor Relations

Mn. marginal number

p. page

p.p. pages

PR Public Relations

List of Figures

Figure 1: The process of an IPO

List of Tables

Table 1: Characteristics for the stock market maturity

Table 2: Overview of the follow-up costs of an IPO

Table 3: Listings and delistings in Germany from 1997 - 2019

1 Introduction

This assignment will give a general overview of the motives, the process and the risks of an Initial Public Offering. As part of this assignment, the Frankfurt Stock Exchange was chosen as an example. The requirements for a company and the admission by the BaFin should be exemplary for the different parts of the process of an IPO in general.

An IPO describes a company’s first-time placement of shares on a regulated market of a stock exchange. This can mean converting a company from private to public ownership. The transition from a private to a public company can be an important time for private investors to fully realize gains from their investment as it typically includes share premiums for current private investors. Meanwhile, it also allows public investors to participate in the offering.1

The company will go through different phases during an IPO. During the process strengths, weaknesses, risks and opportunities will be assessed by the company and external parties. Once the decision is made for an IPO it can be a promising step towards a more independent future of a company.2

2 Objectives and motives for an IPO

From a company perspective there are various motives for performing an IPO, however internal and external growth are the most important motives.3 An important advantage of the broadened capital base, after an IPO, is that the company is less dependent on debt financing and that increases its flexibility. Entrepreneurial decisions can be implemented directly, if the financing is carried out on an equity basis. Whereas less flexibility is given on a dept capital basis, as the sometimes time-consuming decisions of a bank to grant a loan is often an obstacle.4

Besides that, motives most frequently encountered in practice can be summarized in two categories: Company-related motives and Owner-related motives:

Abbildung in dieser Leseprobe nicht enthalten

2.1 Company-related motives

An IPO can give a company access to the capital market to finance its own growth. Especially for medium-sized companies an IPO can enable a greater diversification of financing sources. That can support expansion opportunities, expands debt financing options and open up the possibility of replacing expensive debt financing. This will lead to a reduction in capital procurement costs and it will significantly reduce the dependence on lenders that has prevailed.5

During and after the IPO, the companies are in the focus of the financial community and are therefore much more present than others. Through an active investor relationship management, the positive publicity effect can be used for a better standing towards suppliers, customers, banks, shareholders and other cooperation partners. As the company becomes better known, its creditworthiness tends to increase as well. Due to high transparency requirements associated with the IPO obligations it is easier for various stakeholders to check the company´s creditworthiness from a risk perspective. This effect is called Spill-Over-Effect.6

The IPO also gives the company the opportunity to use share-based incentives, by granting shares and stock options to the managing board and employees as part of stock options or employee stock option plans. This can be part of an employee retention strategy. In the period from 2014 to 2018 for example, most companies that went public introduced an employee participation programs and/or involved the management through stock ownership plans.7

Furthermore, an IPO can support the recruitment of qualified employees by attracting talent.

Small and medium-sized companies are also increasingly realising that the need for transparency and greater openness associated with an IPO is not only a burden but also an opportunity for communication.8

2.2 Owner-related motives

An IPO naturally also gives the founder or existing shareholders the opportunity to realize parts of the increase in value. This step is not seen negatively by the public, but it is to be expected that there will be a critical feedback if the funds flow too much to the founding shareholders. The capital market does not like it when an entrepreneur, who was responsible for the successful performance in the past years, leaves the company completely with the IPO. This is the main reason why an exit of an entrepreneur via the IPO should be done step by step.9

3 Overview of an IPO process

Various sources claim that a period between four and seven months can be realistic for an IPO.10 Therefore it is important to plan the phases of an IPO in advance and to record them in a detailed timetable. Within the framework of project management, it is also necessary to determine responsibilities.11 With such a project structure and joint efforts by all parties involved it can be possible to bring the company to the stock exchange in less than a year.12 The members of the management and the project team will have to spend a great deal of time on the IPO - in addition to normal business operations.13 However, the time spend certainly depends on the existing structures within the company and how good the process is organised.

The following figure is based on Wolfgang Weitnauers 14 work and extended with the latest information from Deutsche Börse Capital Market / Frankfurt Stock Exchange. 15 It shows the phases of an IPO and the different steps during each phase:

Figure 1 : The process of an IPO

Abbildung in dieser Leseprobe nicht enthalten

Source: Own figure according to: Wolfgang Weitnauers, Praxishandbuch Börsengang, 2006, p. 31-43

The first phase is preparation: Once the decision within the company or among the shareholders is positive for an IPO, the preparation can begin. The internal project team will be formed. Next to the managing board it should include employees from the special departments like legal, finance, risk and human resources. All these departments will have to deliver data and input in the following phases.

During the so-called beauty contest the company selects the underwriting bank(s), the lawyers, the consultants and an investor relations agency from several candidates. For each position two to four candidates will be invited to make presentations and the company will select the best fit for the needed positions in the project team.16 The aim here is to find competent and experienced partners. All preparatory measures should be treated confidentially up to this point in order to avoid public speculation.

If a participation programme is to be introduced for management and employees, this must be defined and should be formulated in the company’s contracts under company law.17

After the IPO team has been formed it will formulate the emission concept and the timetable will be set.18

A critical assessment of the capital market maturity of the company will be done by the team. The assessment includes the minimum economic, legal and organisational requirements for a listed company, but especially the fulfilment of stock exchange-specific equity requirements. If the company is not yet organised in a marketable legal form, the conversion process must begin. From a legal perspective this also means a change of identity – e.g. towards an AG or a KGaA.19

[...]


1 See “Roadmap for an IPO - A guide to going public: November 2017,”: 83, https://www.pwc.com/us/en/deals/publications/assets/pwc-roadmap-for-an-ipo.pdf, accessed October 2019.

2 See Mathais Habersack, Peter O. Mülbert, and Michael Schlitt, eds., Unternehmensfinanzierung am Kapitalmarkt, 4th ed. (Köln: Otto Schmidt, 2019),Mn. 3.9.

3 See Schalast, Grundlagen des M&A-Geschäftes (Springer Fachmedien Wiesbaden, 2019), p. 525.

4 See Praxishandbuch Börsengang: Von der Vorbereitung bis zur Umsetzung, 1st ed. (Wiesbaden: Gabler Verlag / Springer Fachmedien Wiesbaden GmbH Wiesbaden, 2006), p. 24.

5 See Wolfgang Weitnauer, Handbuch Venture Capital: Von der Innovation zum Börsengang, 6th ed. (München: C.H.Beck, 2019), Mn. 93.

6 See ibid., Mn. 93.

7 See Schalast, Grundlagen des M&A-Geschäftes (Springer Fachmedien Wiesbaden, 2019), p. 526.

8 See ibid., p. 526.

9 See Praxishandbuch Börsengang: Von der Vorbereitung bis zur Umsetzung, 1st ed. (Wiesbaden: Gabler Verlag / Springer Fachmedien Wiesbaden GmbH Wiesbaden, 2006), p. 25.

10 See Praxishandbuch Börsengang: Von der Vorbereitung bis zur Umsetzung, 1st ed. (Wiesbaden: Gabler Verlag / Springer Fachmedien Wiesbaden GmbH Wiesbaden, 2006), p. 31.

11 See Schalast, Grundlagen des M&A-Geschäftes (Springer Fachmedien Wiesbaden, 2019), p. 528.

12 See ibid., p. 543.

13 See ibid., p. 543.

14 See Wolfgang Weitnauer, Handbuch Venture Capital: Von der Innovation zum Börsengang, 6th ed. (München: C.H.Beck, 2019), p. 132.

15 See “Deutsche Börse Cash Market - Road to IPO,” https://www.deutsche-boerse-cash-market.com/dbcm-en/primary-market/going-public/Road-to-IPO-1428126, accessed November 2019.

16 See Praxishandbuch Börsengang: Von der Vorbereitung bis zur Umsetzung, 1st ed. (Wiesbaden: Gabler Verlag / Springer Fachmedien Wiesbaden GmbH Wiesbaden, 2006), p. 127.

17 See ibid., p. 130.

18 See Schalast, Grundlagen des M&A-Geschäftes (Springer Fachmedien Wiesbaden, 2019), p. 528.

19 See Malte Huchzermeier, Investor Relations beim Börsengang, 1st ed. (s.l.: DUV Deutscher Universitäts-Verlag, 2006), p. 197.

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Details

Title
The process of an Initial Public Offering. Objectives and motives for an IPO
College
University of applied sciences Frankfurt a. M.
Course
MBA
Grade
1,3
Author
Year
2019
Pages
18
Catalog Number
V919351
ISBN (eBook)
9783346246103
Language
English
Notes
Comment of the Professor: The assignment is well structured, is has a sound literature coverage and good line of argument (1,3 is the best available grade in class).
Tags
MBA
Quote paper
Samantha Kim Schönhaber (Author), 2019, The process of an Initial Public Offering. Objectives and motives for an IPO, Munich, GRIN Verlag, https://www.grin.com/document/919351

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