IPO (Initial Public Offering) is the first public share sale of a joint-stock company, including the sale in the form depositary receipts for shares, to the unlimited circle of persons. The sale of shares can occur both by placing of additional issue of equities via open subscription and by the public sale of issued shares.
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There are a few primary purposes for IPO, importance of that can differ depending on a certain case:
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- Bringing in of capital in a company: realization of IPO allows the company to get access to the capital of much more larger circle of investors.
- The company shares at the capital market gives the most objective estimation to the company cost, which can be used as an instrument of estimation of activity and motivation of managers, or reference-point for the transactions of confluence and merger.
- The shareholders of company get possibility to sell their whole stock or part of the shares and to capitalize the expected future income of the company.
- Liquidity of capital of shareholders after realization of IPO also increases sharply, for example, the banks give out credits much more willingly on the security of the shares of the quoted (public) companies then the closed (private) companies.
After realization of IPO the company becomes public, with clear and transparent accounting, which is priority of most companies.
At the preliminary stage, the adequate estimation of the company cost is important, in order to avoid the overvalue of assets by the interested party, as happened at the beginning of 2000s, after IPO of internet-companies. At the western fund market, inflation of “bubble” of internet-companies and crash of dot-coms have happened, as a result the index of NASDAQ tumbling more than three times, due to the enhanceable volatility and incorrect primary estimations of the companies. For the resolution of the situation in the Europe and USA an act was passed about the division of commissions according to which, the fixed part of the broker’s withholdings is paid for the analysis. As a result analytical agencies got the stable financing and possibility to develop, and investors got access to independent analysis from a side disinterested in sales.
IPO today is one of the most important instruments of the fund market, which is of great interest for the developing companies.
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