First, we’ll focus on equity, capital markets, ECM. This is when a company raises equity through an IPO or a seasoned equity offering. Let’s start by answering an essential question.
Why would a business want to go public?
There are several reasons to do so, A firm could be interested in a stock exchange listing when it needs to finance its expanding business. Growth requires significant financial resources and an IPO could be an excellent way to raise a sizable amount of capital. In addition, when a company lists its shares in public markets, stakeholders will have a clear idea of the market value of the entire entity. Once market participants start buying and selling the listed securities, they’ll establish a market price.
Therefore, the company could use this valuation as acquisition currency if they wish to acquire another business using stock. The shareholders of the target entity will have a much better idea of how much they are offered. A stock exchange listing significantly boosts the prestige and credibility of every organization. It’s associated with critical dimensions, crystal clear financial reporting and a vote of confidence by large investors. Nowadays, many managers receive stock as part of their annual compensation.
This is designed to align management incentives with shareholder goals. Public companies use this tool to incentivize their top managers and stimulate them to run a profitable company that preserves value in the long run. Therefore, another good reason why a business could pursue a stock exchange listing is to provide employees who own stock options with the necessary liquidity, and an IPO makes stock based compensation much more material and gives an accurate idea of the value of shares issued as compensation to employees.
Lastly, IPOs are often considered an exit opportunity for the founders of the business. They’ve worked hard to start and grow the company an opportunity to monetize their success. Most IPOs sell a significant portion of the firm to institutional investors, and once this occurs, founders will likely lose control of the organization. Typically, institutional investors elect a board of directors after the IPO, which decides who will be hired as CEO to run the company.
In this next Article, we’ll talk about the investors in an IPO, who are they, what type of companies they’re interested in, and their investment horizon.
