Inititial Public Offerings TEAM A

Topics: Initial public offering, Underwriting, Corporate finance Pages: 7 (1427 words) Published: February 14, 2015

Initial Public Offerings: Team A
Christopher Lee, Jonathon Meisterling, Kerri Foster, Kevin Therriault, Rebekah Brown & Tim Huddleston
December 8, 2014
Matthew Tanzer

Initial Public Offerings
In the business world, companies are always looking for ways to make more money in order to expand. There are many different ways to go about this, all of which come with a certain amount of risk. One of the more common methods is for a company to issue an initial public offering. While there is risk involved as well as a lot of hard work, the advantages can be too good to pass up. The role of the investment banker and underwriter

When a company wants to issue its first sale of stock to the public, an initial public offering, it will hire an underwriter. Because an IPO means that this is the company’s first introduction into the public business world, there is a substantial amount of risk. The underwriter is hired to manage those risks. An underwriter is usually an investment bank that employs IPO specialists. They ensure that the company has met all regulatory requirements, and they provide all mandatory financial data is made available to the public. They seek out and identify significant prospective buyers of stock, and then recommend an IPO price to the firm. This determines the price the shares will be sold at (Ozyasar, 2014). The underwriter will usually provide a guarantee to the business to sell a specific amount of stock, and if it fails, then it agrees to buy the stock itself. This ensures that the underwriter will work diligently to sell the stock it commits to selling, and if it does not and has to buy the shares itself, it will then sell the shares on the open market (Ozyasar, 2014). This risk means that the underwriters will do all they can to help ensure that the stocks get sold on the open market. The role of an originating house and a syndicate

Investment banks that form a group to perform underwriting services are known as a syndicate. As previously discussed, the primary role of an investment bank involves underwriting or guaranteeing a company a certain set price for the securities that they plan to issue during the initial public offering. Syndicates must perform a detailed risk assessment of the enterprise offering an initial public offering. The syndicate is responsible for meeting the guaranteed price from the public sale, and therefore must perform due diligence in setting that price. These risk assessments include a full listing of the company’s strengths and weaknesses, as well as scrutiny of the financial statements of the business (Reference for Business, 2014). One investment firm within the group, also known as the originating house, is chosen to manage the syndicate. Underwriting syndicates are either divided or undivided. The individual investment firms in a divided syndicate are only responsible for their portion of the security sales. In a divided account, each member of the syndicate has limited liability and responsibility for other members of the syndicate in regards to the quantity of security sales (All Business, 2014). In an undivided syndicate, all members hold an equal responsibility for any unsold portion of securities during an initial public offering. When a company decides to sell new securities in order to raise funds, it usually goes through underwriters (Mayo, 2012, p. 39). Before these underwriters offer these securities to the public, pricing for the new issue must be determined. Underwriters research and analyze several factors to ensure that this price will be neither too high nor too low. In this study the company’s financial statements, current and past profitability, public trends within that company’s industry, growth rates of similar companies, and investor confidence in the industry and that specific company (Public offering, 2014). Securities priced too high will not attract investors. The underwriters are then forced to hold...

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Mayo, H. B. (2012). Basic finance: An introduction to institutions, investments, and management (10th ed.). Retrieved from The University of Phoenix eBook Collection database.
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Reference for Business. (2014). Investment Banking: Acquisitions Integration. Retrieved from http://www.refererencefor
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