Strategic Finance

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Strategic Finance

Introduction

Initial Public Offerings (IPOs ) have been a useful tool used by companies to finance their operations , for a long time . IPOs have enabled companies access funds without borrowing from lending institutions , as these attract high interest rates . In Initial Public Offerings (IPOs , a company sells its stocks to the public . Funds raised through this means may finance expansion projects for companies in accordance with their strategic expansion plans

There are four categories of IPOs The first one is

the Primary Offering and in this case , the proceeds of the offering go to company that is issuing it (Draho , 2004 . The second is the Secondary Offering and in this situation , a major shareholder disposes his or her share of the company , with the proceeds going to them . The third is the Split Offering , which combines secondary and primary offerings . The fourth offering is called the Shelf Offering and it gives authority to a company to issue securities over a period of two years , depending on the financial needs of the company

Initial Public Offerings are handled by stock market experts , and is usually a contract between the issuer of the stocks and the underwriter The function of the underwriter is to find market for the stocks . This role is usually played by a collection of investment banks , led by the lead underwriter , with the help of other banks , collectively called the syndicate . There are two ways in which an IPO may be performed the traditional way and the on-line auction

Traditional IPOs

In this type of IPO , the company decides the capital figure that it wants to raise and subsequently calculates the number of shares that it will offer and at what price . This price is usually lower than the market price (Wallace Winters , 2006 . These shares are usually divided between institutional and retail investors and before the IPO the company and underwriter carry out a road show to increase awareness about the offering , to institutional and large investors . After the roadshow , the company allocates shares and in case of over subscription investors get fewer shares than they applied for . After trading commences , the share price usually appreciates since it was initially discounted

An advantage of this type of offering is the favorable publicity gained when share price rises , when trading commences . A disadvantage is that it is expensive to carry out a traditional IPO . Another disadvantage is that it favors large institutional investors

On-line auction

This type of IPO uses the Internet to sell shares of a company to larger numbers of investors . Just like the traditional IPOs , the company and underwriter determine the shares to be offered , and the share price (James Cunningham , 2007 . A roadshow is also conducted but in this case , shares are not allocated . When bidding opens , the company sets a price that it does not expect bidders to bid and gradually increases it until someone bids . Those shares are sold and bidding continues until all the shares...