Investment Banking, 3rd Edition

CHAPTER 8Initial Public Offerings

An initial public offering (IPO) represents the first time a company (“issuer”) sells its stock to public investors. The shares are then traded on an exchange such as the Nasdaq Stock Market (Nasdaq), the New York Stock Exchange (NYSE), the London Stock Exchange (LSE), or the Stock Exchange of Hong Kong (SEHK). Collectively, these primary exchanges comprise what is commonly known as “the stock market”. Each publicly-traded company assumes a “ticker symbol”, typically a one-to-four-letter abbreviation that serves as a unique identifier. Once a company “goes public”, its shares will trade daily on the open market where buyers and sellers determine its prevailing equity value in real time.

An IPO is a transformational event for a company, its owners, and employees. In many ways, the company and the way it operates will never be the same again. Detailed business and financial information will be made public and subject to analysis. Management will conduct quarterly earnings calls and field questions from sell-side research analysts. They will also speak regularly with existing and potential new investors. New accounting, legal, regulatory, and investor relations infrastructure and employees will need to be brought on board to handle public company requirements.

While IPO candidates vary broadly in terms of sector, size, and financial profile, they need to feature performance and growth attributes that public investors would find compelling. Is ...