When a company is looking to organize an IPO, it consults the underwriters to sell and promote its shares. In turn, the underwriters get a percentage of each stock sale. Underwriting usually means the process by which the investment bankers raise investment capital from the investors on behalf of corporations and governments that are issuing securities. The term underwriting is very closely related to an IPO. The investment bankers need to underwrite a company to get the investors to buy shares of it for the first time. By underwriting IPOs, the brokerage companies and investment banks have a unique opportunity to make money by underwriting initial public offerings.
Steps to underwrite an IPO
1. Find out regarding the planned IPO: The Company which has decided to go public will get in touch with financial institutions about underwriting an IPO. Thus, your institution may want to establish associations with the local businesses so that they will come to you when they need an underwriter.
2. Discuss the details with the company: It’s better to get as much as information possible about this company both personally and financially. You will also need to know how many shares the IPO will comprise of, the price per share and the type of IPO.
3. Get the copies of the company prospectus: The Company’s prospectus acts as a legal document that provides an outline of the company and the IPO shares plan. You will also have to provide a copy of this document to all the probable shareholders so they can also learn more about the company and the responsibilities of shareholders.
4. Consider other alternative to sell shares: You can also consider other options to sell shares. You can also auction of shares, and commit to sell a certain number without paying upfront or commit to do your best to sell the shares.
5. Remain in touch with the company you are underwriting: The Company must be aware of how the sale of IPO shares is going based on the internal record keeping. You should also make an independent system of checks and balances. But if the underwrite sales go poorly, and then the company may cancel the IPO campaign.
6. Call your clients with large account balances within your institution: The underwriters mostly offer IPO’s to their preferred investors, as the investor with more money can buy a larger percentage of IPO shares if she is interested.
Advantages of going public
1. The financial benefit in the form of raising capital is the most distinct advantage.
2. The capital can be used to fund research and development, fund capital expenditure or even used to pay off existing debt.
3. It increases public awareness of the company because IPOs often generate publicity by making their products known to a new group of potential customers.
4. The market share for the company will also increase.
5. The IPO can also be used by founding individuals as an exit strategy.
Disadvantages of going public
1. Disclosure: The public company is required to share information to others and investors. Hence, it cannot maintain a strict of veil of secrecy over its expansion plans and product market strategies as its non-public counterparts can do. The management will not like the idea of reporting operating data as such data will be available to competitors.
2. Pressure from the public: On account of its greater visibility, the public company will be pressurized to do things it may not otherwise do.
3. Dilution: When a company issues shares to the public, the existing shareholders suffer dilution of their proportionate ownership in the company.
4. Restrictions: There are also restrictions on trading on imposed on directors, management and major shareholders.
Role of an underwriter in the IPO process
The underwriter is a very important part of the IPO as they are the deal managers who handle the entire process. With IPOs, you need an experienced and solid underwriter. The most important part of the IPO is the underwriter. The underwriter is responsible for pricing, selling and organizing the issue. It is very important to select a good underwriter but most of the underwriters are also equally selective of their clients. The reputation of the underwriter depends on successful issues. Thus, only a few companies will be willing to stake their reputation on doubtful companies. To select an underwriter, it is important to seek an established company with a good reputation and quality research coverage in your field. The decision will also depend on the kind of agreement the underwriter is willing to make with regards to share sale.
After the initial public offering, the underwriter continues to provide services for the new public corporation. Even after months or years after the offering, the underwriter will continue to make the market for the stock. As IPO is complex and expensive, it is vital to have a good understanding of what to expect from an underwriter. Without knowing what to expect, it is not possible to make a wise and informed selection.