Stock invest advice - What is an IPO
An initial pubic offering is an
IPO. In effect what an IPO does it takes a private company
public. It is also a means for an existing company listed on
one of the exchanges to spin off or create a new company from
its parent company. It all sounds pretty straight forward.
Reasons for going public:
The most obvious reason for a private company to enter the
public market is raising immediate liquid assets by way of
offering shares in the company. Most private companies would
prefer to avoid all of the burden of complying with reporting
and other regulations, but sometimes a company needs to expand
or generate large sums of money to keep up with competition.
The reasons are the advantage of offering a chunk of the
company without losing control of the company.
IPOs Past and Present:
Before the acts of a few bad apples like Enron, WorldCom and
others IPOs flourished on Wall Street. From the mid 1990s to
the early 2000s each day brought a new public offering to the
market place. Some weeks two or three new IPOs were introduced
to the public market place. There were necessary compliance
issues to deal with and prices to set and then the IPO hit the
market and the exchanges decided what to do with the new kid on
the block. Millions and sometimes more could be generated on
the first day of trading.
That was then and now there is Sarbanes-Oxley a piece of
legislation that was supposed to prospectively cure the market
place of cooked books, fraud and make the investor feel more
secure. There are aspects of this curative piece of legislation
that has provided for more transparency in corporate America.
The auditor independence section makes perfect sense. It seems
like common sense you want your auditor to not have a conflict
of interest. The area of corporate responsibility for
subordinate acts of fraud, errors and omissions makes perfect
sense. Disclosure regarding debt and other adverse actions
involving the company almost seems like a redundancy with other
The effect of the Sarbanes-Oxley and other methods to cut
out bad apples is that it costs a great deal of money to take a
company public these days. There is the need to hire top notch
consultants and extra staff to comply with the ever increasing
paper work and internal structural changes. It is not a bad
piece of legislation, but it is burdensome for a heretofore
small private company to be able to afford. The net effect is
that the IPO is an infrequent event on Wall Street. There may
be other reasons in addition to Sarbanes-Oxley.
Recently, the Blackstone Group introduced an IPO to the
market place. It was priced well, but overall the event was
lackluster. It generated some 20 billion dollars, but all of
the expectations were overstated from the hoopla that preceded
the offering. Perhaps we have simply become jaded.
The IPO is a launch of a newbie. The era of "what's next,"
may be part of our gilded past. It could be a good thing for
the market place or it could signify a final epitaph to the
Horatio Alger story which was overblown in the first place.
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