By Victor Paquet (Mergersight Operations) and Carlo Lepoardi & Tommaso Arona (Boston University partners)
Walkthrough
An Initial Public Offering (IPO) is a process where a privately held company decides to go to the public markets and become publicly traded. A company may choose to undergo an IPO to raise additional capital, increase brand visibility, attract and retain talents by offering stock options, or serve as an exit point for early investors or owners.
A company will hire an investment bank to organize this sales process. They will provide investment banks with all relevant financial data and information, so that the investment bank can act as a middleman. The company may also choose to hire more than one investment bank to spread risk and to ensure widespread distribution of the IPO.
How it is done
The investment banks will serve as underwriters for the IPO, taking on the risk. They will help determine a fair value for the company’s stock shares, and then seek to resell shares at a premium to investors (predominantly institutional i.e. Hedge Funds, Endowment Funds, and Pension Funds) via a roadshow.
An IPO roadshow consists of an investment bank’s process of preparing marketing material and compiling a list of potential investors to pitch the stock to, as they seek to sell shares at the highest price. Within an investment bank, the sales & trading division will work to leverage the investment bank’s network to find investors. After gauging interest and entering non-binding agreements with investors, the investment bank will settle on an IPO price and bring the stock public. Once a stock goes public, retail investors can gain access to the company’s shares via stock exchanges.
Pros & Cons
Cons: A public company is required to release quarterly earnings reports and financial statements to the public to inform investors regarding their financial performance and outlook under local regulatory law. Preparing reports and going public is timely and costly for companies. Current owners lose control over the business as their equity is diluted, and as they are subject to greater volatility from public market sentiment.
Pros: Nevertheless, a company undergoing an IPO is a sign of it establishing itself as a major long-term player. Furthermore, as transparency is increased from regulatory oversight and liquidity is increased from a greater access to equity capital markets, a public company will have access to more favorable debt capital markets as creditworthiness is improved.
An Example at a glance - ARM's IPO
In September 2023,the British chip designer Arm raised $4.87bn in an IPO, valuing the company at $54.5bn.
This IPO comes 19 months after the Silicon Valley chip maker Nvidia abandoned a potential acquisition of Arm in a deal valued at $40bn.
Motivation: Arm was already public in the past before it was acquired and taken private by SoftBank in 2016. As the tech industry’s race to adopt AI get more and more exhilarating, the Japanese conglomerate bet big on the potential profit they could earn through this exit.
Trading on the NASDAQ, this is another recent example of the semiconductor war between the US, China and the rest of the world, a war that China is slowly but surely losing...