Initial Public Offering, or IPO in short, is the first sale of stock by a private company to the public, usually utilised by large companies looking into being publicly traded. It is also a common exit strategy of major investors in a company, and at times used by younger companies looking for capital to expand. After IPO, many companies will have to abide to more regulations, given that part of the company belongs to the public.
Trading IPO stocks can be common, but few understand the process of choosing an IPO as an exit strategy. To understand IPO as an exit strategy, we first need to understand the indicators to investors.
Large appetite for IPOs
The market for IPO has swung in different directions several times since it started. Besides knowing the demand for IPOs, assess the demand for your company’s products and services. Public appetite for your stocks is highly dependent on the demand of your products and services. A positive indication from the IPO markets together with the high demand of your company’s products and services often fetch a higher company valuation during IPO. Financial professionals have suggested that a good company can IPO anytime as its stocks will always be in high demand.
Management team to remain
In most situation, the management team of the company remains after investors choose IPO as an exit strategy. This is similar to that of a management buyout. The difference is that in a management buyout, the management team might not be working on the same product and services anymore. Instead, they might be working on the new products and services of the acquiring company. However, an IPO can bring in complications when there is a new set of public regulations you have to abide to. Moreover, the company will now have to meet the demands of a new set of investors who are often more concerned with their short term rewards than the progress of the company in the long run. However, if your intention is to minimise any changes in the operations and management of your company and retain the core business, an IPO will be a viable exit strategy.
Company must be well known
Looking at the list of companies that completed IPO, many such as AT&T wireless and General Motors and Visa are well known even before they are public. Other than having a new set of public regulations that the company has to conform to, lack of company awareness amongst the public also increases the cost of IPO. This is due to underwriting fees and costs related to organising road shows to convince your potential investors the value of your stock.
IPO is often not a popular exit strategy for many investors unless a company is successful with great growth potential. As of 2015, only 170 IPOs were completed in US. Nonetheless, it is great to know the investors’ decision criteria when deciding on an exit strategy.