An Introduction to Corporate Finance: Transactions and Techniques, Second Edition

Chapter 3

FLOTATIONS/INITIAL PUBLIC OFFERINGS

A flotation is the initial sale of a company’s shares to the public and the listing of the shares on a stock exchange. Flotations are also called Initial Public Offerings (IPOs). The process of flotation is long and arduous, involves significant time commitments from the company’s management and advisors (investment bankers, stock brokers and solicitors amongst others) and is not cheap. So why do companies float? Put simply, to raise cash; either for the company itself (a primary offering) or for the existing shareholders (a secondary offering).

 

This chapter begins by describing the rationale behind flotations. An overview of the offering process is followed by more detailed discussions of the legal and documentary requirements and the process of marketing, syndication and sales.

PRIMARY OFFERINGS

Companies which are raising capital by creating and selling new shares may do so for many reasons:

• to raise cash in order to expand the business of the company;

• reduce the debt levels (gearing) of the company;

• obtain access to alternative sources of finance;

• enhance its image and publicity;

• motivate and retain management and employees through share ownership and options;

• exploit a perceived mis-pricing by investors.

Flotation is often seen as the final step in the financial development of a company. On establishment, it is the savings of their founders that typically finances companies. As the company grows, the founders may borrow ...