A primary market in today’s business arena is one which issues new securities on an exchange. The system of primary markets create an environment in which investors get first crack at a new security issuance. Generally, the issuing company offers its equity to the investors or to different groups and receives cash proceeds from the sale, which is then used in funding the business operations and expand it(Geddes, 2013). This is the largest source of funds with a long or possibly infinite maturity for the company.
Pre-IPO Financial Performance and Aftermarket Survival
A good number of researches have suggested that the technology boom of the late 1990’s creates an era of unprecedented worsening of the quality of firms which undertake the initial public offerings. This has been propagated from the period of 1980’s in which firms displayed signs of financial weakness with the rate of failure of issuers became in the rise(Gregoriou, 2011). A framework of analysis in assessment of the likelihood of failure in the period 1980-2000 among IPO firms shows that the pre-issue profitability is a good indicator of the aftermarket survival.
From 1980, approximately more than nine thousand privately held corporations have partaken initial public offering (IPOs). Through the process of making their stock available to the public, the companies have successfully raised a total of $450 billion.Basically, the companies look at the IPOs as a key source of capital –a pool of capital which can be used in the expansion and diversification of operations, building of new facilities and undertake a development of new products and technologies. The market for IPO presents lucrative attraction to the investors; though it seems risky, it presents an opportunity to invest in forward-looking firms with a potential of greater growth.
Even though, the statistics on issuance indicate that there is rising popularity of IPOs over the last two decades, there is less information on the quality of those companies seeking equity financing. First, this article estimates the profitability of the firm based on return on assets, which is defined as net income after taxes divided by total assets (Geddes, 2013). Secondly, the second significant indicator of financial soundness is the capitalization, or net worth, defined as the total assets minus total liabilities.
The aftermarket survival of the IPO firms takes various outcomes. When a firm has put its stock available to the public, it can continue operating as a viable concern by trading among the major stock exchanges. It can rather be acquired by another firm, decide to go private again or even liquidate with the worst scenario being that it be delisted.
Appropriate Learning Objective: IPOs
An initial public offering (IPO) is the process in which a public company go public and sell its stock shares in the firm. A firm becomes eligible to selling its stock shares to the general public by undertaking an IPO. Thus becomes a public company (a firm with general shareholders) from a private company where there are no general shareholders (Gregoriou, 2011).
The benefits of going public entail money making move, attract top management candidates and lastly its stocks can be used in acquisition and merger deals as part of the payment.
The analysis of this article serves as a reminder in which a viable and well-functioning IPO market should entirety be based on companies with strong business plans and sound fundamentals. Investors should embrace a broad range of IPOs across the entire spectrum of risk.