Becoming a publicly traded company brings significant changes, not the least of which is that in the future the results and operations of the company will be exposed to public scrutiny. The process of raising public money is also vastly different from a private placement. The company must find an investment bank to underwrite the offering and manage the offering process. In this case, the board started interviewing investment banks early in the life of the company and has already selected and built a relationship with its first choice.
The most critical factor for the offering will be the condition of the market. Stocks of different types move in and out of favor so it is important for the IPO to occur when there is a strong demand for similar stocks. If the demand is weak, the initial share price can be depressed. Clearly, the bank cannot control the market, but prior to the IPO it does “show” the company to the market through a limited number of presentations in a nationwide “road show.” This process is intended to help create a “market” for shares of the newly public company.
The timing turns out to be good; in the two months prior to the offering several other companies with similar technologies have come on the market at $18 a share and higher, and all analysts who follow this field are “bullish” on these companies. Anticipating strong demand, the investment bank sets the initial price at $20 a share for an offering of 3 million shares. Their acumen is fulfilled; the offering opens at $20 and has risen to $25 a share by close of market on the first day’s trading. The summary of the new valuation at the IPO is shown in Table 7.
The company has now raised an additional $60 million for future growth and expansion. In addition, anyone who owns shares now has an opportunity of selling them in order to realize personal gain; however this is done with some caveats:
After an IPO, SEC regulations require that insiders cannot sell stock for six months.
When insiders sell stock, then others outside the company might ask why this person wants to sell if it represents a good investment. Thus, selling stock can send the wrong signals to the public market and depress the share price. Notice in the example that the shares for the public market did not come from existing shareholders, the intention being to send a strong signal to the market that “this is a valuable stock, and knowing what I know I expect it to rise to much higher value in the future.”
