Known colloquially as going public, an IPO stands for Initial Public Offering and is a type of stock market launch whereby shares of a company are sold to the general public on a securities exchange.
A company transitions from being privately held, to a public company, as a result of an IPO.
The main reason for a company to file an IPO is to raise money and expand capital. However a company may decide to go public purely to move away from being privately held, or alternatively to boost investments made by early private investors.
Advantages of an IPO
There are various benefits to going public – from boosting public image with increased media exposure, to attracting and retaining better staff through liquid equity participation. However, the main benefits revolve around money, chiefly the enlarging and diversifying of equity base.
Going public also affords a previously private company with cheaper access to capital as well as the facilitation of acquisitions. An IPO also creates multiple ways in which to generate finance opportunities, be it equity, convertible debt, or cheaper bank loans.
Continue reading to find out who holds the record for the biggest IPO ever.
Disadvantages of an IPO
Although there are many advantages to an IPO, there are a similar number of disadvantages which must be taken into account. Firstly the IPO process is a costly one, with significant legal, accounting and marketing costs.
There is also the requirement to disclose all financial and business information, which could prove useful to competitors, suppliers and customers. Public companies run the risk that the required funding sought may not get raised, while also having to face loss of control and stronger agency problems thanks to new shareholders.
History of the IPO
Although the earliest issuing of public shares can be traced back to Roman times, the first modern IPO was filed by the Dutch East India Company in March 1602. In the United States, the Bank of America was the first company to go public in 1783.
The largest global IPO to date was The Alibaba Group who raised a staggering $25 billion in its 2014 IPO. Other notable IPOs include Facebook, which became the biggest IPO in technology and one of the biggest in internet history. With media pundits calling the IPO a ‘cultural touchstone’, the May 18 2012 public offering saw a peak market capitalisation of over $104bn.
Facebook founder Mark Zuckerberg, Facebook IPO