An Initial Public Offering is the process by which a private company goes public. The company offers to the public investors shares of its equity in the primary market. These shares are then traded on the secondary market, most of the time on a public stock exchange like the New York stock exchange or the London stock exchange.
Basically, companies go public because they need to raise cash in order to grow. An IPO can also allow a given company to acquire other companies using stock.
Other reasons for an IPO may include the will of the original owners to sell stock in order to get some cash and liquidity especially if they feel that they will get a fairly high price at that moment.
As you probably know, it is the task of Investment Banks to take care of IPOs that usually consists of three main steps.
The first phase, called �beauty contest� involves meetings between the company�s owners with I-bankers of different banks who will eventually estimate the price of the stock. It is a real contest between rival I-banks, and the winner, chosen by the owners to underwrite the IPO is usually the one that announced the highest stock price.
Due diligence is the next step. At this point, the dealmakers study accurately the corporation�s businesses and the legal procedures (prospectus) are already in the way of completion.
The final phase is called �road show�, it is the marketing part of the IPO: the company searches for potential investors and promotes the offer. This phase ends with the setting of a definitive starting stock price which will usually increase during the first day of trading if the IPO is successful.
The I-bank earns an underwriting discount, a sort of commission, which typically amounts for 8% of the deal.
A recent example of a successful IPO is the introduction of Google to the stock market in 2004 with a starting price of 80$ per stock. Now the Google share trades at 200$.
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