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Why are investors interested in IPOs? Why would a company go public?

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Why are investors so interested in IPOs?

Given all the cons of going public, why would a company choose to do this?

Investor A purchases stock through an IPO. After 90 days, Investor A sells the stock to Investor B. In which markets did these transactions occur? Why would a company chose to buy stock in the secondary market?

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- Why are investors so interested in IPOs?

A company usually begins to think about going public when the funding required to meet the demands of business expansion begin to exceed its ability to raise additional private/venture capital funding or debt capacity.

Initial Public Offerings are great if the investors want shareholder liquidity to diversify their wealth. It can also bring cash into the company for expansion. Being public also makes customers feel more comfortable that the company is finally a mature, stable company. It makes it easier to use stock options to attract key employees. They can even use the "funny money" of stock certificates to acquire other companies without cash.

There are some disadvantages too. It puts the investors in the fishbowl. Everything they do becomes public record: salary, strategic alliances, and profit and losses. A lot of time is spent on SEC (Securities and Exchange Commission) reporting regulations, and handholding shareholders. Also, in some cases, the company just hasn't positioned itself to get the best valuation.

- Given all the cons of going public, why would a company choose to do this?

First, let's take a brief look at the cons of IPO:
* IPO Cons:

- Limited liquidity. To ensure investor confidence, business owners are usually unable to sell large amounts of stock in an ...

Solution Summary

In an 850 solution, the response gives a list of multiple reasons for both pros and cons of going public. It is a comprehensive listing and well explained. Next the secondary markets are explained in terms of their desirability.

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Advise the Board on Appropriate Funding Sources

Assume that you have recently joined a family owned renewable energy company in the UK and your first task is to advise the board on appropriate funding sources to secure the 100m that the company requires to fund a new investment project.

You have been asked to provide a report detailing the various funding sources available to the company to secure this level of funding. You have been further advised that the existing owners are all engineers
and as such your report should also include a glossary of terms.

Presently the firm has no debt and the shares of the firm are held privately by five brothers each holding 20% each. All of the brothers recognize the need to secure outside funding but are naturally nervous about the potential dilution of power. Note further that this may just be the initial round of funding and the owners are keen on options that provide subsequent access to funding at a later date.

Essentially the firm has to choose between debt and equity. However there are many different variants of each of these funding options. In addition to this it is no longer the case that a company would float on the stock exchange closest to where they are geographically located (see recent cases of luxury brands "floating" in Asia). In addition both options offer different characteristics regarding subsequent capital raising and their role in management motivation and incentive.

Your assignment should demonstrate the following qualities:
1. An in depth understanding of the available funding opportunities facing the company. These should be supplemented by examples.
2. Recognition of the issue of the reduction in "power" and how this could be mitigated.
3. Recognition of the pro's and con's of debt versus equity with regard to on-going funding.
4. Acknowledgement that both debt and equity comes in a variety of different forms. Again, these should be supplemented by examples.
5. Written in such a manner that a non-subject specialist (such as an Engineer could understand)
6. An understanding that market for IPO's has become a global one. Again, supplemented by examples.
7. An understanding of the potential role in each of these in funding channels in motivating management (if any).
8. Clear evidence of personal research and links to real world examples.

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