An Initial Public Offering (IPO) means issuing new shares of a private company to the public so that private company can transit into a public company. IPO help private company to raise capital from public investors for the growth and expansion of the business. When a private firm decides to raise capital from a wide range of investors it may decide to go public. This means it sell its security to the general public and allow investor to freely trade this security. This first issue of shares to the general public is called initial public offering or IPO an IPO process in the USA includes certain steps which are as follows:
- An underwriters presents a proposal in respect to offering price and amount of shares to be issued after the valuation.
- The company then select the underwriter and undergoes through a underwriting agreement.
- An IPO team is formed which includes underwriter, certified public accountants, securities and Exchange commission expert and lawyer.
- Then the company related information if compiled for IPO documentation. A prospectus and privately held filing information are included in the S-1 Registration statement. S-1 statement includes the expected date of filing.
- marketing of the share issuance are done to estimate the demand and set the offering price.
- Then Board of Directors are formed.
- Financial and accounting information must be audit.
- Then the company issues its shares on an IPO date.
- Some post IPO provisions must be instituted such as underwriters are allowed to buy additional amount of shares after the offering date.
The following are the various reasons for which companies go public and issue IPO:
- To raise funds for the company
The main reason firms decide to get themselves listed in stock exchanges is to raise additional funds. This might be for several reasons such as growth, expansion, meeting debt obligations, etc. When the public subscribes to the shares, the firm gets an inflow of funds.
- An exit strategy adopted by the existing investors One way the already existing investors can use to leave the firm is through IPO. These already existing investors are the company’s institutional promoters and private investors. These investors will sell their shares to the public, thereby liquidating their portion completely.
- To increase the liquidity of the firm’s shares when a firm goes public, its shares are listed on the stock exchange. This provides a platform to buy and sell by all the traders, thereby increasing the liquidity of the shares. Moreover, they also become more marketable.
- Ensures more compliance leading to transparency
A public company is required to file documents, make information available to the public, meet all the necessary compliance procedures, and so on. This will all lead to an increase in transparency and confidence among the investors.
- There can be chances of takeovers and mergers when companies go public through IPO, they get a large amount of funds. The majority of firms use it for growth and expansion. Firms often use the amount to acquire other smaller firms of the same line of business or use it further for research and development.
Importance of pricing in IPO can be understood from the below mentioned:
- The significance of the IPO offer price is driven by different preferences between individual and institutional investors. Individual investors prefer lower-priced stocks, while institutional investors prefer higher-priced stocks.
- At the pre-listing stage of an IPO, RII and NII (individual investors) follow the QIB investors (institutional investors) by avoiding the lowest-priced IPOs.
- At the post listing stage, a link between the lowest IPO offer price ranges and initial turnover is also established.
- The initial turnover (IPO listing day trades) shows that investors trade less at the lowest range of IPO offer price. Individual (lowest range) and institutional investors (higher range) maximize their respective post-listing ownership at diverse ranges of IPO offer prices.
- IPO underpricing is positively related to a higher likelihood of IPOs being oversubscribed in the QIB category (as compensation by the company to institutional investors). 6. Listing day trading is positively associated with IPO underpricing and individual holders in the ownership structure of the company. This study gives certain aspects of individual investors’ behavior towards IPO offer prices, which further affects the initial trading and ownership structure post-IPO.
Rivian Automotive Inc. (RIVN)
RIVN Company is a type of manufacturing company which manufactures electrical vehicles and associated different types of accessories. Company has produced its first product or generation called R1T which is type of truck having fiver passenger with two rows. After a year company decided to deliver a unique productSUV named R1S having three row and seven passenger. Both products were according to advanced technology system. The design of the both products was also very advanced. In recent time company decided to introduce a new van for business customers which fully operated on electricity. The idea behind this van to minimize the dependability on the petroleum products. The overall operation of the company was large and was needed to get the funds to expend their operation for capturing the market share. In this regard company decided to go for the initial public offering. On November 10th 2021 Company went for initial public offering. Company issued around 153 million shares at $78 each, valuing company at 67 billion dollars. The offering price was raised to around 12 billion dollars. The company was registered at the NASDAQ with symbol RIVN. The opening price of the company was 106.75 dollar, comparatively to opening price of the company it was closed on that day at 100.73 dollar per share. The total valuation of the company was 86 billion dollars which was more than the market capitalization of famous Ford Motor Company.
RIVAN raised around 12 billion dollars which was the biggest initial public offering in the United State since 2014. On November 12, 2021 was rose to 21 % comparatively to first day of the trading at the stock exchange. Within three days company stock rose to 21 %, this shows that investors has shown their trust and huge confidence along with their expected earning of the company.
At the end of November 29th,2021 the stock price was closed at 129.95 dollar each. At this price the total market capitalization of the company was closed to 127. 3 billion dollars which was almost doubled the market capitalization on the opening day price of the company. Before going for IPO, company had gathered from different funds a large pool of investment. Company had last private fund round 2.5 billion dollars which was gathered from investors group in July 2021. Since 2019, total 10.5 billion dollars was priced through private funding.
The price of the company share was raised due to different reason out of which one was the demand for the company products was forecasted was higher and the expectation or forecasted revenue was also higher. The overall IPO of the company opens new doors for the company to gather the large pool of investment by offering ownership rights by issuing common stock. The approach of the company to finance their projects was fully concentrated on the equity financing when company went for IPO. Though in the past company had used different source of funds which were available for them. Due to IPO the total value of the company in the market since November 2021 get higher and more than the double before the 12 November 2021. The rise in the price of the stock shows that investors has shown their trust on the company cash flows.
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