Unpack key topics that impact banking, investing, financial services and the wider economy in this award-winning explainer series.
One way a company pursues growth is through an Initial Public Offering, or IPO. An IPO is a key milestone in a company’s journey, where its shares are listed and sold in a public exchange. Simply put, it’s the process a private company takes to become public.
Private companies decide to become public for multiple reasons: to raise capital for growth, to establish a market price for its shares, to gain increased financial and strategic flexibility, and to enhance public visibility.
How long does the process take? Who are the main parties involved? How is a company’s share price determined?
This is IPO, Unpacked.
An IPO is the culmination of months of work from multiple participants: the company, the investment banks, lawyers, the Securities and Exchange Commission, and institutional investors.
Going public means becoming a fully transparent organization accountable to its shareholders, other investors, and regulators.
It can take a company several years to prepare for an IPO.
The preparation phase is all about internal audits to review financials, controls, compliance, and corporate governance.
Next is the “bake off” phase. This is when investment banks compete to administer a company’s IPO by pitching their execution and distribution capabilities. The result is one or two banks that will lead the transaction.
Once advisors are selected, the main marketing document, or the “Registration Statement” is drafted and filed with the SEC, usually on a confidential basis. At the same time, a marketing presentation is drafted with key investment highlights.
After the first filing, the first interaction with investors occurs in a process called “testing the waters.”
Investors are highly selective when deciding to invest in an IPO. They look for a strong management team, market leadership, growth, large addressable markets, and strong financial performance.
Feedback from these meetings and valuation perspectives from the leading firm’s Equity Research analysts help banks determine a price range for shares.
The price range captures multiple factors. These include market conditions and comparable valuation to public peers. It also includes a discretionary discount to entice investors to take a risk on a company that has no track record in the public eye.
Once the preliminary valuation is determined and market conditions are favorable, the S1 is filed with the SEC and becomes available to the public. This happens 15 days before launching the IPO and kicks off a “roadshow” with investors.
During this time, the company meets with investors in the large financial hubs. Investors will place an order for a certain number of shares at a certain price, and all orders are aggregated by the lead banks during the “book building” process.
The book building ends on “Pricing Day.” This is when the banks and the company decide on how to allocate the shares and what price they should be.
The objective is to secure long-term investors. They will support the company’s growth over time and buy additional shares, instead of investors who will sell the stock shortly after receiving it.
Since the market needs buyers and sellers, investment banks and the company must strike a balance between investors who will hold onto the stock and those who will sell.
The day after pricing, the company’s shares will begin trading on a public stock exchange like the NASDAQ or New York Stock Exchange. Now they are freely tradeable for anyone to buy or sell in the aftermarket.
An IPO is only the beginning of the journey, not the final destination. Once public, the market will hold the company accountable for performance and ongoing transparency and disclosure.
Over time, as the company executes on their business plan, the stock price should increase, creating shareholder value.
An initial public offering, or IPO, is the process a private company takes to become public and one way a company pursues growth. In this video, learn what is involved with an IPO transaction, including the key players, what investors consider, how a company’s share price is set and more.
The material contained herein is intended as a general market and/or economic commentary and is not intended to constitute financial or investment advice. Any views or opinions expressed herein are solely those of the speakers and do not reflect the views of and opinions of JPMorgan Chase. This information in no way constitutes JPMorgan Chase research and should not be treated as such. Further, the views expressed herein may differ from that contained in JPMorgan Chase research reports. The information herein has been obtained from sources deemed to be reliable, but JPMorgan Chase makes no representation or warranty as to its accuracy or completeness.