An initial public offering or initial purchase offer (IPO), referred to simply as an "offering" or "flotation", is when a company (called the

issuer) issues common stock or shares to the public for the first time. They are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately owned companies looking to become publicly traded. In an IPO the issuer obtains the assistance of an underwriting firm, which helps determine what type of security to issue (common or preferred), best offering price and time to bring it to market.

Contents
[hide]

1 History 2 Reasons for listing 3 Disadvantages of an IPO 4 Procedure 5 Auction 6 Pricing 7 Issue price 8 Quiet period 9 Stag profit 10 Largest IPOs 11 See also 12 References 13 External links 14 Further reading

[edit] History
This section requires expansion. In 1602, the Dutch East India Company was the first company to issue stocks and bonds in the world in an initial public offering.[1]

[edit] Reasons for listing

When a company lists its securities on a public exchange, the money paid by investors for the newly issued shares goes directly to the company (in contrast to a later trade of shares on the exchange, where the money passes between investors). An IPO, therefore, allows a company to tap a wide pool of investors to provide it with capital for future growth, repayment of debt or working capital. A company selling common shares is never required to repay the capital to investors.

Once a company is listed, it is able to issue additional common shares via a secondary offering, thereby again providing itself with capital for expansion without incurring any debt. This ability to quickly raise large amounts of capital from the market is a key reason many companies seek to go public. There are several benefits to being a public company, namely:

Bolstering and diversifying equity base Enabling cheaper access to capital Exposure, prestige and public image Attracting and retaining better management and employees through liquid equity participation Facilitating acquisitions Creating multiple financing opportunities: equity, convertible debt, cheaper bank loans, etc. Increased liquidity for equity holder

[edit] Disadvantages of an IPO

There are several disadvantages to completing an initial public offering, namely:

Significant legal, accounting and marketing costs Ongoing requirement to disclose financial and business information Meaningful time, effort and attention required of senior management Risk that required funding will not be raised Public dissemination of information which may be useful to competitors, suppliers and customers

[edit] Procedure
IPOs generally involve one or more investment banks known as "underwriters". The company offering its shares, called the "issuer", enters a contract with a lead underwriter to sell its shares to the public. The underwriter then approaches investors with offers to sell these shares. The sale (allocation and pricing) of shares in an IPO may take several forms. Common methods include:

Best efforts contract Firm commitment contract All-or-none contract Bought deal Dutch auction

A large IPO is usually underwritten by a "syndicate" of investment banks led by one or more major investment banks (lead underwriter). Upon selling the shares, the underwriters keep a commission based on a percentage of the value of the shares sold (called the gross spread).

Usually, the lead underwriters, i.e. the underwriters selling the largest proportions of the IPO, take the highest commissionsup to 8% in some cases. Multinational IPOs may have many syndicates to deal with differing legal requirements in both the issuer's domestic market and other regions. For example, an issuer based in the E.U. may be represented by the main selling syndicate in its domestic market, Europe, in addition to separate syndicates or selling groups for US/Canada and for Asia. Usually, the lead underwriter in the main selling group is also the lead bank in the other selling groups. Because of the wide array of legal requirements and because it is an expensive process, IPOs typically involve one or more law firms with major practices in securities law, such as the Magic Circle firms of London and the white shoe firms of New York City. Public offerings are sold to both institutional investors and retail clients of underwriters. A licensed securities salesperson ( Registered Representative in the USA and Canada ) selling shares of a public offering to his clients is paid a commission from their dealer rather than their client. In cases where the salesperson is the client's advisor it is notable that the financial incentives of the advisor and client are not aligned. In the US sales can only be made through a final prospectus cleared by the Securities and Exchange Commission. Investment dealers will often initiate research coverage on companies so their Corporate Finance departments and retail divisions can attract and market new issues. The issuer usually allows the underwriters an option to increase the size of the offering by up to 15% under certain circumstance known as the greenshoe or overallotment option.

[edit] Auction
This section does not cite any references or sources. Please help improve this section by adding citations to reliable sources. Unsourced material may be challenged and removed. (December 2006) A venture capitalist named Bill Hambrecht has attempted to devise a method that can reduce the inefficient process. He devised a way to issue shares through a Dutch auction as an attempt to minimize the extreme underpricing that underwriters were nurturing. Underwriters, however, have not taken to this strategy very well which is understandable given that auctions are threatening large fees otherwise payable. Though not the first company to use Dutch auction, Google is one established company that went public through the use of auction. Google's share price rose 17% in its first day of trading despite the auction method. Brokers close to the IPO report that the underwriters actively discouraged institutional investors from buying to reduce demand and send the initial price down. The resulting low share price was then used to "illustrate" that auctions generally don't work.

Perception of IPOs can be controversial. For those who view a successful IPO to be one that raises as much money as possible, the IPO was a total failure. For those who view a successful IPO from the kind of investors that eventually gained from the underpricing, the IPO was a complete success. It's important to note that different sets of investors bid in auctions versus the open marketmore institutions bid, fewer private individuals bid. Google may be a special case, however, as many individual investors bought the stock based on long-term valuation shortly after it launched its IPO, driving it beyond institutional valuation.

[edit] Pricing
The underpricing of initial public offerings (IPO) has been well documented in different markets (Ibbotson, 1975; Ritter 1984; Levis, 1990; McGuinness, 1992; Drucker and Puri, 2007). While issuers always try to maximize their issue proceeds, the underpricing of IPOs has constituted a serious anomaly in the literature of financial economics. Many financial economists have developed different models to explain the underpricing of IPOs. Some of the models explained it as a consequences of deliberate underpricing by issuers or their agents. In general, smaller issues are observed to be underpriced more than large issues (Ritter, 1984, Ritter, 1991, Levis, 1990) Historically, some of IPOs both globally and in the United States have been underpriced. The effect of "initial underpricing" an IPO is to generate additional interest in the stock when it first becomes publicly traded. Through flipping, this can lead to significant gains for investors who have been allocated shares of the IPO at the offering price. However, underpricing an IPO results in "money left on the table"lost capital that could have been raised for the company had the stock been offered at a higher price. One great example of all these factors at play was seen with theglobe.com IPO which helped fuel the IPO mania of the late 90's internet era. Underwritten by Bear Stearns on November 13, 1998, the stock had been priced at $9 per share, and famously jumped 1000% at the opening of trading all the way up to $97, before deflating and closing at $63 after large sell offs from institutions flipping the stock. Although the company did raise about $30 million from the offering it is estimated that with the level of demand for the offering and the volume of trading that took place the company might have left upwards of $200 million on the table. The danger of overpricing is also an important consideration. If a stock is offered to the public at a higher price than the market will pay, the underwriters may have trouble meeting their commitments to sell shares. Even if they sell all of the issued shares, if the stock falls in value on the first day of trading, it may lose its marketability and hence even more of its value. Underwriters, therefore, take many factors into consideration when pricing an IPO, and attempt to reach an offering price that is low enough to stimulate interest in the stock, but high enough to raise an adequate amount of capital for the company. The process of determining an optimal price usually involves the underwriters ("syndicate") arranging share purchase commitments from leading institutional investors. On the other hand, some researchers (e.g. Geoffrey C., and C. Swift, 2009) believe that IPOs are not being under-priced deliberately by issuers and/or underwriters, but the price-rocketing phenomena on issuance days are due to investors' over-reaction.[2]

Some algorithms to determine underpricing: IPO Underpricing Algorithms

[edit] Issue price

A company that is planning an IPO appoints lead managers to help it decide on an appropriate price at which the shares should be issued. There are two ways in which the price of an IPO can be determined: either the company, with the help of its lead managers, fixes a price or the price is arrived at through the process of book building. Note: Not all IPOs are eligible for delivery settlement through the DTC system, which would then either require the physical delivery of the stock certificates to the clearing agent bank's custodian, or a delivery versus payment (DVP) arrangement with the selling group brokerage firm.

[edit] Quiet period

Main article: Quiet period There are two time windows commonly referred to as "quiet periods" during an IPO's history. The first and the one linked above is the period of time following the filing of the company's S-1 but before SEC staff declare the registration statement effective. During this time, issuers, company insiders, analysts, and other parties are legally restricted in their ability to discuss or promote the upcoming IPO.[3] The other "quiet period" refers to a period of 40 calendar days following an IPO's first day of public trading. During this time, insiders and any underwriters involved in the IPO are restricted from issuing any earnings forecasts or research reports for the company. Regulatory changes enacted by the SEC as part of the Global Settlement enlarged the "quiet period" from 25 days to 40 days on July 9, 2002. When the quiet period is over, generally the underwriters will initiate research coverage on the firm. Additionally, the NASD and NYSE have approved a rule mandating a 10-day quiet period after a Secondary Offering and a 15-day quiet period both before and after expiration of a "lock-up agreement" for a securities offering.

[edit] Stag profit

Stag profit is a stock market term used to describe a situation before and immediately after a company's Initial public offering (or any new issue of shares). A stag is a party or individual who subscribes to the new issue expecting the price of the stock to rise immediately upon the start of trading. Thus, stag profit is the financial gain accumulated by the party or individual resulting from the value of the shares rising. For example, one might expect a certain I.T. company to do particularly well and purchase a large volume of their stock or shares before flotation on the stock market. Once the price of the shares has risen to a satisfactory level the person will choose to sell their shares and make a stag profit.

[edit] Largest IPOs

General Motors $23.1B in 2010 Agricultural Bank of China $22.1B in 2010[4] Industrial and Commercial Bank of China $21.9B in 2006[5] American International Assurance $20.5B in 2010[6] NTT DoCoMo $18.4B in 1998[7] Visa Inc. $17.9B in 2008 AT&T Wireless $10.6B in 2000 Rosneft $10.4B in 2006 Santander Brasil $8.9B in 2009

Why does a company go for an IPO? An IPO stands for Initial Public Offering. It is the process in which a large company issues shares to the general public for the first time to raise cash and capital for its expansion and business usage.

Answer
There are two basic ways to raise money for something like an expansion: selling part of the equity of the company through a stock sale, and creating debt by selling bonds. There are advantages and disadvantages to both. In the case of selling equity, the major disadvantage is the loss of some of your autonomy. Investors hate to lose money, and want to make sure you're doing what it takes to make money. The upside is once you've sold the stock, you don't necessarily have any further expenditures. A lot of companies, especially high-tech ones, don't pay dividends. Also, dividends are paid out of after-tax profits. If you sell bonds, you must pay interest on time or risk default. The tradeoff here is there's not much loss of autonomy, and bond interest payments come out of pre-tax income.

Relevant answers:

Why do corporation go for an IPO? A corporation would go for an IPO to raise money. This money can be used for anything like: Business Expansion Acquisition of smaller companies Payout of debt/loans etc In most cases IPO's are taken... Which companies can issue an IPO? Not all company's can issue shares to the public. SEBI has provided a list of requirements that need to be met by a company if they wish to go public. A company that wishes to go public needs to meet... What do you do when you have to go to the free company? go to the toisleet How does a company present an IPO? Steps in an IPO Process: This is how an initial public offering process is initiated and reaches its conclusion. The entire process is regulated by the 'Securities and Exchange Board of India...

Why company issue IPOs? Generally, a company has an Initial Public Offering in order to raise a good deal of money in order to expand/grow the business. In the IPO prospectus, the company will summarize exactly how they... An initial public offering IPO is when a company does what? IPO is when a company issues its shares to the public for the first time. Can private companies issue his shares to public? Not without becoming a public company. And that requires registration with FTC and meeting many requirements. Is Sony a private or a public company? Sony is a Ltd company, it's public What is the purpose of initial public offering? The purpose of an Initial Public Offering is to offer shares of a company to the public for the very first time. An initial pricei is set for the share and then investors from across the country can... What is the purpose of an initial public offering? An initial public offering (IPO) is a way to raise money by changing a company from a privately held one to a corporation, by selling shares of stock. The first shares sold are often more valuable...

Why IPO?
Many entrepreneurs have the dream of taking their companies from a start-up to one that is very successful and growing significantly. Part of that dream typically involves the company becoming public with its shares traded on a recognized stock exchange. Why do entrepreneurs have this dream of taking their companies public? The public markets allow companies to raise an important amount of capital that may not otherwise be available to small privately funded companies. We have seen and read stories over the years of companies struggling to raise capital in the private markets. A number of executives have developed good strategies for their companies. However, they often have limited financial resources to execute on their strategies as existing and new shareholders are unwilling or unable to provide additional funding. The public markets may eliminate part of this risk, thereby allowing the company to grow to the next level. Many entrepreneurs take their companies public as a mechanism to allow their initial shareholders (friends, family, venture capitalists, etc.) to achieve some liquidity on their original investments. Most investors in start-up companies make their investments expecting that one day these companies will have their shares traded on the public markets, thereby allowing them to dispose of their shares and reap the benefits of their initial investment. Another benefit to being a public company is the increased credibility that the company may have in the eyes of its customers, suppliers, partners, employees and the community at large. Public companies tend to have more visibility within business circles than private companies, as many people perceive being publicly traded is one of the criteria to being a successful company.

The compensation of employees through a stock option program is generally more valuable in a public company setting than that of a private company, as employees have an opportunity of assessing the value of those options through the movements of the stock price. Over the last decade, many employees in private companies have questioned the value of stock option programs, particularly as companies have struggled to close their next round of financing. Stock option programs of public companies could therefore be seen as a competitive advantage for attracting and recruiting new employees. Public companies whose strategies include growing through mergers and acquisitions have a significant advantage in using their shares as a currency for the transaction when compared to private companies. Once a company has become a successful public entity, it can go back to the markets for additional funding through the issuance of new shares to allow even further expansion. Many factors will influence the companys ability to return to the markets for additional financing such as, its success in delivering on its strategy and expectations, the receptivity of stock markets to financings in general and the appetite of investors for the shares of the company. With the challenging markets of the last couple of years, we have seen periods during which very few offerings were brought to market, as investors had little interest in increasing their exposure to the equity markets.

Why IPO drought is great for investors

Companies prefer to go public when the appetite for new stocks is strong, but is IPO activity a good contrarian indicator? According to this chart from Bespoke Investment Group, which shows initial public offering activity among U.S. companies going back to 1990, there appears to be a clear correlation between the number of IPOs each month and the performance of the S&P 500. No wonder: If the market is purring, investors are interested in new stocks. And if investors are interested in new stocks, companies can raise more money. But for investors who love patterns, theres a pretty clear one here: A dive in IPO activity can signal capitulation among investors. That is, when the stock market is weak, investors wont touch an IPO, and therefore companies ice their plans to go public. The number of IPOs shrank close to zero during the darkest days of the financial crisis, in late 2008 and early 2009. Looking back, that was an excellent time to wade back into the stock market as an investor. Right now, IPO activity is in some sort of grey zone: It has picked up tremendously with the stock markets recovery in early 2009, but it is nowhere near the peaks seen in the 1990s or even earlier this decade for that matter. According to Bespoke, IPO activity has averaged about 13.75 per month this year, down from an average of 25 between 2004 and 2007. In the late 1990s, driven by insatiable demand for dot-com stocks, the number of IPOs per month regularly rose above 80.

In other words, this IPO-indicator looks like a lot of other indicators out there. Things are better than they once were, but theyre still not great

May 27, 2011, 10:48 am I.P.O./Offerings | Deal Professor

Why I.P.O.s Get Underpriced

By STEVEN M. DAVIDOFF

Michael Nagle/Bloomberg NewsApplauding at the start of LinkedIns first day of trading.

The debate over the pricing of initial public offerings has been vigorous. In his op-ed column in The New York Times, Joe Nocera wrote on Saturday that LinkedIn was scammed by its bankers, who underwrote LinkedIns initial public offering. The evidence: the money LinkedIn lost by underpricing its I.P.O. On Monday Andrew Ross Sorkin disagreed on DealBook, offering several reasons why LinkedIn may have benefited from such underpricing and inviting a dialogue on the issue. Whos right? Luckily for all of us, there are academics who have devoted their entire careers to studying I.P.O. underpricing. That is, why do companies repeatedly go public at a price significantly lower than the first-day closing price? In LinkedIns case, the underpricing was more than 100 percent, the amount LinkedIns shares rose on the first day of trading. Academics have found that I.P.O. underpricing is ubiquitous. Jay Ritter has documented underpricing over the years. According to Professor Ritter, the average underpricing for I.P.O.s in the United States was 14.8 percent from 1990 to 1998, 51.4 percent from 1999 to 2000 and 12.1percent from 2001 to 2009.

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Over the last 50 years, I.P.O.s in the United States have been underpriced by 16.8 percent on average. This translates to more than $125 billion that companies have left on the table in the last 20 years. I.P.O. pricing is also a worldwide phenomenon. In China, the underpricing has been severe, averaging 137.4 percent from 1990 to 2010. This compares with 16.3 percent in Britain from 1959 to 2009. In most other countries, I.P.O. underpricing averages above 20 percent. What explains this widespread phenomenon? There are a number of overlapping and nonexclusive theories: Information Asymmetry The most prominent explanation and the one with the most empirical support is that I.P.O. underpricing occurs because of informational asymmetry. The information asymmetry theory assumes that the I.P.O. pricing is a product of information disparities.

This theory takes a variety of forms, but the most influential one was put forth by Kevin Rock almost a quarter-century ago. He theorized that uninformed investors bid without regard to the quality of the I.P.O. Informed investors bid only on the offerings they think will gain superior returns. But with weak I.P.O.s only uninformed investors will bid and lose money. The losses are so great that the uninformed investors will eventually leave the I.P.O. market. If you were an economics major, you might recognize this problem as a lemon theory named after George Akerlofs famous paper on how used cars are priced when information is uncertain. The underwriters, however, need the uninformed investors to bid since informed investors do not exist in sufficient number. To solve this problem, the underwriter reprices the I.P.O. to bring in these investors and ensure that uninformed investors bid. The consequence is underpricing. This theory has found empirical support in papers that have found that when investment banks can allocate shares in greater measure to informed investors, the underpricing is reduced since the compensation needed to draw uninformed investors is lower. Underpricing has also been found to be lower when information about the issuer is more freely available so that uninformed investors are at less of a disadvantage. Another informational-based theory for I.P.O. underpricing is known as informational revelation. This theory centers on the book-building process, the mechanism by which an underwriter builds a book of potential investors and the prices and number of shares they are willing to purchase. The book-building process is intended for the underwriter to assess demand and obtain information from potential buyers about what price buyers are willing to pay. In order to incentivize investors to disclose sufficient information about the price they believe is appropriate, underwriters allocate fewer shares to potential purchasers who bid low. But underwriters still discount the stock to incentivize aggressive bidding and to ensure that the bids are not even lower since the more bids there are, the more information is revealed about the appropriate price for the stock. Issuers accept this underpricing because it allows underwriters to better gauge a higher sale price. This theory too has found empirical support in the academic literature. A third strand of the informational asymmetry theory asserts that underpricing is associated with the weakness of the issuer. The underpricing is intended to compensate the purchasers for this weakness. This theory has found weak evidential support. Investment Banking Conflicts The investment bank conflict theory, the one Mr. Nocera supports, posits that investment banks arrange for underpricing as a way to benefit themselves and their other clients. There is some mixed evidence to support this argument.

A number of papers have found that investment banks do respond to appropriate incentives to reduce underpricing. Higher I.P.O. commissions have been found to reduce underpricing. At least one paper has found that underpricing is reduced by more than 40 percent when an American bank and American investors are involved. This is attributable to the higher underwriting fees that American investment banks charge. In addition, the greater the underwriters stake in the I.P.O. through ownership of the offered shares, the less underpricing, though there is conflicting evidence on this point. Papers have also found that underwriters who incorrectly underprice their business do lose the chance for future I.P.O.s. Managerial Conflicts The managerial conflict theory posits that management is the primary cause of the underpricing. In its principal form, the manager conflict theory postulates that management creates excessive demand for I.P.O. shares in order to ensure that management can sell their holdings after a contractual 180-day lockup for a higher price. Alternatively, management allows underpricing to ensure that there are many purchasers of the shares. This means there are no large shareholders created by the I.P.O., shareholders who may be more incentivized to replace management. There is not much evidence to support either form of this theory. Litigiousness and Regulation This theory posits that the underpricing is because of American securities laws that impose strict liability on the issuer and underwriter for material misstatements and omissions made in connection with the I.P.O. The underwriter deliberately underprices the I.P.O. to ensure that even if there is such a misstatement or omission the purchasers do not have a claim since these failures are priced in the I.P.O. This theory has not found much support primarily because regulatory schemes in other countries are much laxer yet I.P.O. underpricing happens there as well. Behavioral Explanations These theories have gained attention in the wake of the technology bubble. One form of this theory posits that either institutional investors or managers gain from taking advantage of retail shareholders who act irrationally or otherwise against their economic interests. And that both institutional shareholders and managers therefore underprice I.P.O.s to lock in these gains. A variation of this theory posits that it is the institution that allows this underpricing as a result of its own inability to recognize the loss. There is uncertain evidence for these behavioral theories, but they do help in explaining extreme rises like LinkedIns. And these are but a few of the competing theories for I.P.O. underpricing. They may explain I.P.O. underpricing of 10 percent to 20 percent, but they dont explain the extreme underpricing of a debut like LinkedIns.

Mr. Sorkin discusses some reasons why this may be appropriate, including a need to show a successful I.P.O. rather than a price drop and the fact that LinkedIn may gain by selling its shares later at a higher price. These may be the reasons, or perhaps Mr. Nocera is right. But I have my own theory that overlaps a bit with Mr. Sorkins. If LinkedIn had sold the same number of shares as it did last week at about $100 per share, it would have made an extra $200 million or so. But this assumes that there were enough investors willing to buy shares at that level. LinkedIn and the other shareholders sold less than 10 percent of the firms outstanding shares. A sale at $100 a share would have reduced demand and certainly wouldnt have given the company the publicity it did. Now, LinkedIn can wait and sell shares later at this higher price, gaining more money in the aggregate. The company, meanwhile, received national publicity for its Web site, something that may be worth the tens of millions of dollars alone, if not mor

Why IPO ratings should be welcomed

: When the Securities and Exchange Board of India (Sebi) decided to scrap discretionary allotment for qualified institutional buyers (QIBs) and switch to the more transparent proportionate allotment system, it became the first regulator to stand up to the powerful investment banking community anywhere in the world. Once the decision was taken, it was evident that the exaggerated outrage and predictions that large institutional investors would shun IPOs were completely baseless. That decision recognised the specific needs of the Indian capital market and was the result of pressure from investor groups. The path to mandatory grading of IPOs has been rocky, with enormous opposition from companies, investment bankers, fund managers, market experts and Sebi board members. We learn that the final decision came about in the face of strong opposition by certain board members (apparently not full-time) and that too only, with a twist in the tail, which dilutes the original...

A Historical Perspective On Why IPO Underpricing Persists

Abstracted from: IPO Underpricing Over The Very Long Run By: Prof. David Chambers and Prof. Elroy Dimson Judge Business School, Cambridge University (DC); London Business School (ED)

Journal of Finance - Vol. 64, No. 3, Pgs. 1407-1443

Underpricing in the long-term perspective. Understanding the forces that have driven the IPO market since World War I can help financial executives navigate the treacherous, unpredictable market environment they face today. In an expansive study of British IPOs between 1917 and 2007, finance professors David Chambers and Elroy Dimson show that the level of IPO underpricing has fluctuated dramatically over the decades, responding to regulatory forces as well as the nature and interests of IPO market participants. The study covers three periods: 1917 to 1945; the post-WWII period of 1946 to 1986; and the Big Bang era of 1987 to 2007. Given the evolution of regulatory and market practices, the authors expected to find that underpricing had decreased over time, but it did not. In the earliest period, underpricing averaged 3.80%; it rose to 9.15% during the post-war time frame; and in the 21 years between 1986 and 2007, it catapulted to 19% for all British IPOs. Banks step in. Weak investor protection and listing requirements dominated for years after World War I. Until 1929, 30% of IPOs did not have an underwriter. Instead, the role typically was filled by self-serving company directors, stock brokers, company promoters, or a breed of industrial trust. Merchant banks were reluctant to step in until after the establishment of the Issuing Houses Association in 1945, which represented the regulatory interests of new issue underwriters. Subsequently, investment banks underwrote virtually all IPOs. The introduction of reputable investment banks in the IPO marketplace after 1945, along with more stringent disclosure rules that increased transparency, should logically have led to decreased levels of underpricing. In fact, underpricing increased after World War II and intensified after 1986. Wary investors led to underpricing. The authors cite a number of factors to explain this phenomenon. In the early part of the 20th century, issuers often tapped local issuing houses and investors situated around the Provincial Stock Exchanges to participate in an initial public offering. Trust cultivated by ties to the local community might explain why underpricing for these issues was low, compared to IPOs selling on the London Stock Exchange. The larger, more centralized market that arose after WWII drew more cautious, less trusting market participants, who sought assurance through underpricing. Mistrust prevailed. The prestigious banks that dominated the IPO market after WWII also exerted market power. Before then, half the IPOs were issued on a partially paid basis, which left more money on the table than a fully paid issue. The disappearance of partially paid deals after 1945 suggests that prestigious banks used their influence to promote issuing methods hospitable to underpricing, rather than those that would benefit the issuers or selling shareholders. The rising threat of hostile takeovers may also have prompted nonselling managers to use underpricing as a way to retain control while making their stock attractive to a wider shareholder base. The rise in institutional ownership and the "winner's curse" problem supported the underpricing trend. The influence of pension funds and insurance companies became more pronounced, the authors indicate, as their share of equity ownership rose from 1.8% in 1919 to nearly 50% by 1987. Taken together, these factors suggest that improvements in investor protections, accounting standards, and regulations were not enough to overcome investors' mistrust.

Greater Transparency Reduces IPO Underpricing

Abstracted from: The Pricing Of IPOs Post-Sarbanes-Oxley By: Prof. Jarrod Johnston and Prof. Jeff Madura Appalachian State University (JJ); Florida Atlantic University (JM)
Financial Review - Vol. 44, No. 2, Pgs. 291-310
Overlooked advantage of Sarbanes-Oxley. Most discussions of the Sarbanes-Oxley Act over the last seven years have focused on the statute's requirements for more comprehensive internal controls and the high costs and time commitments associated with its reporting requirements. Yet one potentially positive

side to these increased controls is overlooked by companies preparing to go public. Because SarbanesOxley improves transparency, finance professors Jarrod Johnston and Jeff Madura considered whether the Act diminishes IPO underpricing. According to some studies, underpricing occurs because an issuer wants to attract investors, provide a cushion against legal liability, and reward investment banks for analyst coverage. Other researchers theorize that underpricing occurs when investors lack information known to the company's managers and that the level of underpricing increases with investors' uncertainty and information gap. Factors such as underwriters' prestige, company size, or the presence of venture capital backing may also affect levels of underpricing. Since Sarbanes-Oxley weeds out noncompliant issuers and reduces the level of uncertainty through greater controls and transparency, the authors surmise that it should also reduce underpricing levels. Transparency calms anxiety. Theoretically, issuers complying with Sarbanes-Oxley would leave less money on the table in an initial public offering, and, by reducing underpricing, the statute would also affect an IPO's aftermarket performance. If prices are not engineered to produce higher returns from the outset and if investors have clearer expectations, Sarbanes-Oxley presumably would prevent substantial aftermarket corrections. To test this hypothesis, the authors measured initial and aftermarket returns before and after the law was enacted in 2002. Even after adjusting for other factors that might influence pricing, the IPOs launched before Sarbanes-Oxley showed mean initial returns of 25.5% on the first day of trading, while the post-2002 group had 10.6% returns. After removing the 1999-2000 bubble years, the difference was smaller but still significant. One year later, the pre-Sarbanes issuers saw a mean abnormal return of -8.5%, compared to 5.1% for the post-Sarbanes IPOs. (Such differences did not surface among Canadian companies, which do not operate under Sarbanes-Oxley requirements.) The results suggest that by providing investors with more information and transparency than they would otherwise have, Sarbanes-Oxley reduces investors' uncertainty and allows firms to leave less IPO money on the table.

Analysts' Downgrades And Upgrades Sway IPO Performance

Abstracted from: Investors Adjust Expectations Around Sell-Side Analyst Revisions In IPO Recommendations By: Deepika Bagchee
Journal of Financial Research - Vol. 32, No. 1, Pgs. 53-70
Investors in the dark. During the first three years after an IPO, investors rely more heavily on analysts for information than in later years. Deepika Bagchee believes that early investors seek out every available analyst report and tidbit of news (which often occur together, though both influence stock price independent of one another) and respond more strongly to these shreds of information than investors in older companies. For companies that are going public or that have within the previous three years, investors have less information available to evaluate their track records and future prospects than for companies that have been public for more than three years. Both analysts and investors tend to be very enthusiastic about an IPO, and very early investors are the most optimistic members of the pool of potential investors. As information becomes available, sentiment about the stock tends to decline. Thus, after the enthusiastic frenzy of the first three months, the average IPO underperforms for several years after the offering and thereafter trades like other public companies of the same type. Analyst's status magnifies investors' response. Investors expect analysts who are affiliated with the IPO underwriter to be exceptionally optimistic, the author suggests, but also expect them to have information not generally available. Analysts associated with an IPO carry particular weight with investors, for both downgrades and upgrades, but their downgrades are particularly toxic. When an affiliated analyst issues a downgrade, investors conclude that the situation is worse than has been revealed. Ratings by analysts from reputable firms with big followings also generate bigger market responses. If more than one analyst issues a revised rating in the same direction, investors respond more strongly.

Downgrades have greater impact than upgrades. Looking at abnormal returns in the days following a downgrade, the author finds an average abnormal return of -1.5% (or 15.07% of the three-year underperformance) over the entire period. Many stocks face multiple revisions in analysts' ratings, which augments the impact. On average, analysts' reports account for 48.62% of the three-year underperformance of IPOs. The effect of downgrades is strongest in the four- to six-month period (-6.3%) and gradually decreases over time to 2% in the 31- to 36-month period. During the first three months, apparently any news is good news, since investors ignore downgrades and bad press. (Downgrades actually trigger a price increase of 2%, or about 80% of the boost generated by upgrades in the first three months.) The fourth month begins a highly negative reaction to downgrades (and a rather muted response to upgrades). Perhaps, the author theorizes, the price buoyancy in the first three months is the result of lockup periods that prevent certain investors from selling. As lockups and selling constraints expire, pent-up desire to sell, particularly on bad news, is released. Older company stocks also rise on upgrades and sink on downgrades, but the magnitude of the response is smaller.

IPO Basics: What Is An IPO?

Selling Stock An initial public offering, or IPO, is the first sale of stock by a company to the public. A company can raise money by issuing either debt or equity. If the company has never issued equity to the public, it's known as an IPO.

Companies fall into two broad categories: private and public. A privately held company has fewer shareholders and its owners don't have to disclose much information about the company. Anybody can go out and incorporate a company: just put in some money, file the right legal documents and follow the reporting rules of your jurisdiction. Most small businesses are privately held. But large companies can be private too. Did you know that IKEA, Domino's Pizza and Hallmark Cards are all privately held? It usually isn't possible to buy shares in a private company. You can approach the owners about investing, but they're not obligated to sell you anything. Public companies, on the other hand, have sold at least a portion of themselves to the public and trade on a stock exchange. This is why doing an IPO is also referred to as "going public." Public companies have thousands of shareholders and are subject to strict rules and regulations. They must have a board of directors and they must report financial information every quarter. In the United States, public companies report to the Securities and Exchange Commission (SEC). In other countries, public companies are overseen by governing bodies similar to the SEC. From an investor's standpoint, the most exciting thing about a public company is

that the stock is traded in the open market, like any other commodity. If you have the cash, you can invest. The CEO could hate your guts, but there's nothing he or she could do to stop you from buying stock. Why Go Public? Going public raises cash, and usually a lot of it. Being publicly traded also opens many financial doors:

Because of the increased scrutiny, public companies can usually get better rates when they issue debt. As long as there is market demand, a public company can always issue more stock. Thus, mergers and acquisitions are easier to do because stock can be issued as part of the deal. Trading in the open markets means liquidity. This makes it possible to implement things like employee stock ownership plans, which help to attract top talent.

Being on a major stock exchange carries a considerable amount of prestige. In the past, only private companies with strong fundamentals could qualify for an IPO and it wasn't easy to get listed.

The internet boom changed all this. Firms no longer needed strong financials and a solid history to go public. Instead, IPOs were done by smaller startups seeking to expand their businesses. There's nothing wrong with wanting to expand, but most of these firms had never made a profit and didn't plan on being profitable any time soon. Founded on venture capital funding, they spent like Texans trying to generate enough excitement to make it to the market before burning through all their cash. In cases like this, companies might be suspected of doing an IPO just to make the founders rich. This is known as an exit strategy, implying that there's no desire to stick around and create value for shareholders. The IPO then becomes the end of the road rather than the beginning. How can this happen? Remember: an IPO is just selling stock. It's all about the sales job. If you can convince people to buy stock in your company, you can raise a lot of money.

Next: IPO Basics: Getting In On An IPO

Table of Contents 1) IPO Basics: Introduction 2) IPO Basics: What Is An IPO? 3) IPO Basics: Getting In On An IPO 4) IPO Basics: Don't Just Jump In 5) IPO Basics: Tracking Stocks 6) IPO Basics: Conclusion

Read more: http://www.investopedia.com/university/ipo/ipo.asp#ixzz1X6RqE0Bv No History It's hard enough to analyze the stock of an established company. An IPO company is even trickier to analyze since there won't be a lot of historical information. Your main source of data is the red herring, so make sure you examine this document carefully. Look for the usual information, but also pay special

attention to the management team and how they plan to use the funds generated from the IPO. And what about the underwriters? Successful IPOs are typically supported by bigger brokerages that have the ability to promote a new issue well. Be more wary of smaller investment banks because they may be willing to underwrite any company. The Lock-Up Period If you look at the charts following many IPOs, you'll notice that after a few months the stock takes a steep downturn. This is often because of the lock-up period. When a company goes public, the underwriters make company officials and employees sign a lock-up agreement. Lock-up agreements are legally binding contracts between the underwriters and insiders of the company, prohibiting them from selling any shares of stock for a specified period of time. The period can range anywhere from three to 24 months. Ninety days is the minimum period stated under Rule 144 (SEC law) but the lock-up specified by the underwriters can last much longer. The problem is, when lockups expire all the insiders are permitted to sell their stock. The result is a rush of people trying to sell their stock to realize their profit. This excess supply can put severe downward pressure on the stock price.

Flipping Flipping is reselling a hot IPO stock in the first few days to earn a quick profit. This isn't easy to do, and you'll be strongly discouraged by your brokerage. The reason behind this is that companies want longterm investors who hold their stock, not traders. There are no laws that prevent flipping, but your broker may blacklist you from future offerings - or just smile less when you shake hands. Of course, institutional investors flip stocks all the time and make big money. The double standard exists and there is nothing we can do about it because they have the buying power. Because of flipping, it's a good rule not to buy shares of an IPO if you don't get in on the initial offering. Many IPOs that have big gains on the first day will come back to earth as the institutions take their profits. Avoid the Hype It's important to understand that underwriters are salesmen. The whole underwriting process is intentionally hyped up to get as much attention as possible. Since IPOs only happen once for each company, they are often presented as "once in a lifetime" opportunities. Of course, some IPOs soar high and keep soaring. But many end up selling below their offering prices within the year. Don't buy a stock only because it's an IPO - do it because it's a good investment

Tracking stocks appear when a large company spins off one of its divisions into a separate entity. The rationale behind the creation of tracking stocks is that individual divisions of a company will be worth more separately than as part of the company as a whole.

Page| 2Downloaded from a2zmba.blogspot.c om

Topics Covered
Executive Summary----

---------------------------------------------- 3

Introduction -------------------------------------------

------------------- 4 What Is An IPO----------

--------------------------------------------------- 5

Why Go Public------------------------------------

-------------------------- 8 Getting In An IPO------

-------------------------------------------------- 9

IPO Advantages & Disadvantag

es--------------------- 11 Parameters To Judge An

IPO--------------------------------- 14

Understandi ng The Role Of Intermediari es -- 16

Registration Process--------------------

------------------------- 18 IPO Scams----------------

-----------------------------------------------------19

Salient Features Of IPO Scams----------------

------------26

Page| 3Downloaded from a2zmba.blogspot.c om

Operational Deficiencies ------------------------------------- 27

Measures To Prevent Scams---------------------

-----------28 Recent IPOs--------

------------------------------------------------------29

DEFINITIO NS AND ABBREVIA TIONS------

-------------------- 30 Bibliograph y--------------

---------------------------------------------- 34

Page| 4Downloaded from a2zmba.blogspot.c om

EXECU TIVE SUMMA RY

As we all know IPO INITIAL PUBLIC OFFERING is thehottest topic in the current industry, mainly

because of India being adeveloping country and lot of growth in various sectors which leads

acountry to ultimate success. And when we talk about countrys growthwhich is dependent on the

kind of work and how much importance towhich sector is given. And when we say or talk about industries

growthwhich leads the economy of country has to be balanced and givenproper finance so as to

reach the levels to fulfill the needs of thesociety. And industries which have massive outflow of work

and a bigportfolio then its very difficult for any company to work with limitedfinance

and this is where IPO plays an important role.This report talks about how IPO helps in raising fund for

thecompanies going public, what are its pros and cons, and also it gives usdetailed idea why companies

go public. How and what are the stepstaken by the companies before going for any IPO and also the role

of (SEBI) Securities and Exchange Board of Indiathe BSE and NSE , whatare primary and secondary

markets and also the important termsrelated to IPO. It gives us idea of how IPO is driven in the

market andwhat are various factors taken into consideration before going for anIPO. And it

also tells us how we can more or less judge a good IPO. Then we all know that scams have

always been a part of any sectoryou go in for which are covered in it and also few recommendation

s aregiven for the same. It also gives us some idea about what are theexpenses that a company undertakes

during an IPO. IPO has been one of the most important generators of funds for the small companies

making them big and given a new visionin past and it is still continuing its work and also

for many comingyears.

Page| 5Downloaded from a2zmba.blogspot.c om

INTROD UCTION
IPO

stands for

Initial Public Offering

and means the newoffer of shares from a company which was previously

unlisted. This isdone by offering those shares to the public, which were held by thepromoters or

the private investors prior to the IPO. In the case whenother investors or Promoter held

the shares the stake holding comesdown to the extent their shares are offered to the public. In other casesnew

shares are issued to the public and the shares, which are with thepromoters stay with them. In both cases the

share of the promoters inthe total capital comes down.For example say there are 100 shares in a

company and 50of these are offered to the public in an IPO then in such a case thepromoters

stake in the company comes down from 100% to 50%. Inanother case the company issues 50

additional shares to the publicand the stake of the promoter comes down from 100% to

67%.Normally in an IPO the shares are issued at a discount towhat is considered their intrinsic value

and thats why investors keenlyawait IPOs and make money on most of them. IPO are generally

pricedat a discount, which means that if the intrinsic value of a share isperceived to be Rs.100 the

shares will be offered at a price, which islesser than Rs.100 say Rs.80 during the IPO. When the

stock actuallylists in the market it will list closer to Rs.100. The difference betweenthe two

prices is known as Listing Gains, which an investor makeswhen investing in IPO and making

money at the listing of the IPO. ABullish Market gives IPO investors a clear opportunity to achieve

longterm targets in a short term phase.

Page| 6Downloaded from a2zmba.blogspot.c om

What is an IPO
An IPO is the first sale of stock by a company to

the public.A company can raise money by issuing either debt or equity. If thecompany has never issued

equity to the public, it's known as an IPO.Companies fall into two broad categories:

private andpublic.A privately held company has fewer shareholders and its owners

don'thave to disclose much information about the company. Anybody cango out and

incorporate a company: just put in some money, file theright legal documents and follow the

reporting rules of your jurisdictio n. Most small businesses are privately held. But

largecompanies can be private too. Did you know that IKEA, Domino's Pizzaand Hallmark Cards

are all privately held?It usually isn't possible to buy shares in a private company. You can approach

the owners about investing, but they're notobligated to sell you anything. Public

companies, on the other hand,have sold at least a portion of themselves to the public and trade on astock

exchange. This is why doing an IPO is also referred to as "goingpublic."Pu blic companies have thousands

of shareholders and aresubject to strict rules and regulations. They must have a board of directors and

they must report financial information every quarter. Inthe United States, public companies

report to the Securities andExchange Commission (SEC). In other countries, public companies

areoverseen by governing bodies similar to the SEC. From an investor'sstandp oint, the most

exciting thing about a public company is that thestock is traded in the open market, like any other

commodity. If youhave the cash, you can invest. The CEO could hate your guts, butthere's

nothing he or she could do to stop you from buying stock.The first sale of stock by a private company to the

public,IPOs are often issued by smaller, younger companies seeking capitalto expand, but can also be done by

large privatelyowned companieslookin g to become publicly traded. In an IPO, the issuer obtains

theassistance of an underwriting firm, which helps it determine what typeof security to issue

(common or preferred), best offering price and timeto bring it to market. IPOs can be a risky investment.

For the individualinvest or, it is tough to predict what the stock will do on its initial day of trading and in

the near future since there is often little historical datawith which to analyze the company.

Also, most IPOs are of

IPO Project Report

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AnandRathi (AR) is a leading full service securities firm providing the entire gamut of financial services. The firm, founded in 1994 by Mr. Anand Rathi, today has a pan India presence as well as an international presence through offices in Hong Kong,Dubai and London.

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51.70 -0.2 -0.39% 51.90 52.25 52.30 51.55 946095

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Rang e 52Week High 52Week Low Open Price High Price Low Price Last Price Prev Close Change % Change Average Price Underlying Value Number of contracts traded Turnover in Rs. Lakhs Open Interest Change in O I % Change in O I % 44.40 53.85