Merchant bank executives understand the important role initial public offerings can play in determining the success of a business venture. An initial public offering, or IPO for short, allows a privately held company to raise capital by offering equity interests in the company to the public. The effect of an IPO is to transform a company founded by private investors into a public company.
Companies involved in initial public offerings, such as KIT Capital, are aware of the benefits a successful IPO can have on a company and its private investors. As its shares are purchased by investors on a public stock exchange, the money taken in by a company on an IPO increases its growth capital. The company’s pre-existing private investors see their stake in the company converted into large holdings of newly issued shares of stock. As the price of those shares rises through public trading, so too does the value of the stake in the company held by the private investors.
Initial public offerings are not new in the United States. The first IPO in the United States was in 1783 when Bank of America went public by selling shares of stock. IPOs in Europe go back even further to the Roman Empire. The Dutch East India Company issued public shares in 1602 to raise capital to fund expansion of its operations.
Many believe that the ability to raise much-needed capital through public offerings offers advantages to the owners and managers of privately held companies. An IPO immediately enlarges the ownership base of a company and infuses it with large amounts of capital. The funds raised are cheaper than debt financing and do not require repayment.
Besides creating new financing opportunities, an IPO has the immediate effect of increasing a company’s public exposure. Better public exposure usually leads to more interest in the company from those interested in joining its management team. For a company contemplating expansion into new markets or new industries, having its shares publicly traded offers the potential for a merger or acquisition through stock financing.
An initial public offering can also present disadvantages to a company and its owners. The costs of an IPO can be significant because of marketing, legal and accounting requirements. Owners of a privately held company going public must comply with financial disclosure requirements tied to IPOs that allow public scrutiny of aspects of the company that were once shielded from public view. Public disclosure suddenly allows a company’s competitors and customers to have access to previously confidential and private information about its operations.
A significant disadvantage of an IPO for many business owners is the loss of control over the company once new shareholders acquire an ownership interest. This problem of lost control has resulted in companies attempting to buy back their publicly held shares of stock in order to return the business to private ownership. The difficulty reverting to private ownership is the high cost of acquiring the shares in a publicly traded marketplace.
IPOs can be beneficial to a company seeking to raise expansion capital, but they require planning and timing. The success of an IPO usually depends on the skills of the investment bankers selected by the company to handle everything from valuation of the shares to marketing, regulatory compliance and other details of the offering.