IPO’s- what could be its success formula!

Successful IPO’s need the right mix of many things 

Goldman Sachs and company, the investment-banking firm originally filed its IPO registration form on Aug 24, 1998. A month later, Goldman announced its plan for indefinitely withdrawing its planned IPO.

Why…

In the summer of 1997, the Asian financial markets began to see a downfall beginning with the devaluation of the Thai baht. Its impact was felt in other Asian countries like Hong Kong, Indonesia and Japan. In July 1998, the Dow peaked at 9408, and then shed 20% over a period of six weeks and came down to 7497. In Sep 1998, Goldman postponed its IPO plan due to the instability in the market. It refiled for IPO registration in March 1999 and went public in May when the Dow was at 11031(47% up from Sep 1998).

The above case shows how accurate market timing can help an IPO to succeed.

Successful IPO needs the right mix of….

This depends on:

• Capital requirements

The extent of capital needed for the purpose of expansion or diversification will determine the size of the issue.

• Desired dilution of ownership control

On IPO, there will be an increase in the total number of outstanding shares of the company. This will lead to a dilution in ownership control of the current shareholders. The extent to which the current owners desire this dilution of control will determine the size of the issue.

• Market demand for the company’s shares

How receptive is the general public to the company’s shares? If a strong demand exists, the company may increase the offer size and vice-versa

A successful IPO depends on a good investment banker

Tough competition amongst Investment bankers… many investment bankers will submit their proposal to the company. So how should a company select the right investment banker?

For this it needs to look into:

Experience and track record

The company must look into the experience the investment banker has in the specified industry. It must also study the past track record in successfully handling similar issues, and study how these IPO’s have performed since then.

Reach of the investment banker

Study the distribution network with institutional and individual investors. The soundness of the distribution network will determine the extent of reach of the company’s shares.

Reputation in the market

The company must consider the general reputation enjoyed by the investment banker in the market. As an IPO issue involves the interaction among various market intermediaries, the kind of rapport an investment banker has with the other players plays a crucial role in the IPO process.

Support services offered

This is an important factor to be considered in selecting an investment banker. Support services like- does the investment banker continually research companies coming out with an IPO and publish reports on them for the prospective investors?

Such services add to the personal relationship between the company and the intermediary.

The following is the statement made by Jerry Dagen, CEO of Modern Manufacturing about his investment banker Raymond James, who was very successful in meeting their requirements.

“…I was initially drawn to Raymond James Capital because of the institutional creditability of Raymond James. What closed the deal, however, was their unique value -added operational perspective. Raymond James Capital looked beyond my financial statements, they took the time and energy to truly understand what I want to do with my business.”

Conclusion

The above statement goes to prove that the selection of the right investment banker goes a long way in ensuring the success of the initial offer of shares to the public. 

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