Baderman Island is a resort island surrounded by the Shores of the Kelsey River. Baderman Island is a self-contained and all inclusive resort. The island resort features three hotels and activities such as golf, relaxing at the spa, dining, and shopping. An island has a convention center and an art gallery that contains 1200 pieces of art in its collection. The resort began development in 1988 as a result of a river redirection for flood conservation reasons. In the spirit of growth, Baderman Island is looking to expand operations. Of the 1600 acres of the island, only 750 acres has development, as a result there is still nearly 800 acres left for development. Some of the items on the expansion wish list include adding lodging, building private villas, expanding the convention center, gardens, and recreational facilities. This ambitious plan requires additional financing to make it a reality. The three possibilities to acquire financing include going public through an initial public offering, acquiring another organization in the same industry, or merging with another organization. Evaluating strengths, weaknesses, opportunities, and threats is important to making the correct financing decision. After careful evaluation a decision must be may to pay for this expansion. Introduction of IPO
As an alternative, the Baderman Island Resort could decide to take their company from privately held to shared by issuing an initial public offering (IPO) in the stock market. An IPO is the first issue of stock a company makes, where the issuing firm sells pieces of itself to investors who are now partial owners (Taubman, 2001). The investors own a number of shares, which determines what percentage of ownership they hold. Owning a portion of the firm can be potentially lucrative for an investor if the firm increases in value. After the investors own the shares, which they acquired at a certain rate, they can sell them in the secondary market for a profit, as long as the firm’s value has indeed increased. At times, when a firm has excess net income, they will share those profits with the shareholders through dividends, paying a certain amount per share back to the owners.
As with all great things, IPO’s are not without their drawbacks. A SWOT analysis is helpful for managers and will provide insight with decision. For an initial public offering, a SWOT analysis could be conducted.
Strengths: Through an initial public offering, new capital is raised and may be available quickly and in one lump sum. This is because an IPO is typically not sold to the individual investor directly from the firm; there is a middleman or brokerage firm involved. Also, the firm’s owners gain liquidity because their shares hold value that can be sold readily in the secondary market, not to mention that a publicly held firm tends to enjoy a higher profile, making it easier to attract sales as well as vendors for supplies.
Weaknesses: The greatest weakness may be that the firm is now responsible to share profits with many investors, as well as face the added burden of continuously improving in performance to increase shareholder wealth (the first tenant of finance). Also, now that the firm is responsible to many people, the private investors lose a degree of control over operations and decisions, since a board of directors will be introduced to help insure the interests of public shareholders are accommodated.
Opportunities: Once a firm has entered the stock market through its IPO, there is a much greater ease in future transactions. A firm can continue to raise capital through issues of new shares later. Another opportunity will be a more accurate valuation of the firm, which is now set by the firms’ shares instead of through more subjective standards set by private owners. This could aid the firm if they look for a merger or acquisition in the future. Threats: Reporting practices required by the Securities and...
References: Keown, A. J., Martin, J. D., Petty, J. W., & Scott, Jr., D. F. (2005). Financial management: principles and applications (10th ed.). Upper Saddle River, NJ: Pearson Prentice Hall.
Taubman, L. (2001). Considerations of an IPO. FindLaw.com. Retrieved December 17, 2010, from http://library.findlaw.com/2001/Jan/1/127967.html
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