Initial Public Offering

An IPO is executed by a syndicate led by one or more bookrunners. In a firm commitment underwriting the banks purchase the entire offering from the issuer at a discount to the offer price and resell it, absorbing the risk of unsold shares; in a best efforts arrangement they act as agent and place what they can. The difference between the price paid to the issuer and the price paid by investors is the gross spread, or underwriting discount, which for mid-sized US offerings has conventionally clustered around seven percent and is shared among the lead banks, co-managers and selling group.

Pricing runs through bookbuilding. After the preliminary prospectus is filed, the syndicate markets the deal on a roadshow, collects non-binding indications of interest at various prices, and builds a demand book. An indicative price range is published and then narrowed, raised or cut depending on demand. The final price is set the night before trading, and allocation is discretionary: the bookrunner decides which investors receive shares and in what size, typically favouring long-only institutions expected to hold.

An offering can contain newly created primary shares, whose proceeds net of fees flow to the company, and secondary shares sold by founders, employees, venture funds or a state owner, whose proceeds flow to those sellers. Most IPOs are a mix, and the prospectus states the split explicitly. Only the primary tranche increases the share count and the company's equity; the secondary tranche merely transfers ownership and dilutes no one.

The portion of shares actually available to trade is the free float, and it is often a small fraction of the company. Insiders are usually bound by lock-up agreements of roughly ninety to one hundred eighty days, after which additional supply can reach the market. Syndicates also carry an over-allotment option, the greenshoe, allowing them to sell more shares than planned and then either buy stock back to stabilise a weak deal or exercise the option when demand is strong.

On the issuer's statements, a primary offering raises cash on the asset side and increases contributed capital, split between par value and share premium or additional paid-in capital, with underwriting fees and issuance costs charged against equity rather than run through profit or loss. Earnings per share falls mechanically on the larger weighted average share count unless the proceeds earn a comparable return. The prospectus is the primary document a candidate should associate with the event: it discloses the use of proceeds, the shareholder structure before and after, lock-up terms and risk factors.

In markets, first-day returns on IPOs are on average positive and sometimes large, a persistent pattern usually explained by deliberate underpricing to reward institutional buyers and reduce placement risk, and by information asymmetry between issuer and investors. That gap is money left on the table by the seller, not a cost recorded anywhere in the accounts. Issuance also clusters in windows of strong equity markets, which is why IPO volume is treated as a sentiment indicator.

Distinguish the IPO from the alternatives in the same family: a seasoned or follow-on offering by an already listed issuer, a rights issue that offers new shares to existing holders pro rata, a private placement to a limited set of qualified investors, a direct listing without underwriters, and a merger with a special purpose acquisition company as an alternative route to a listing.

Be able to trace cash: given an offer price, the number of primary and secondary shares and the gross spread, compute proceeds to the company as primary shares times the offer price less the underwriting discount and other issuance costs, and proceeds to selling shareholders separately. Explain who bears risk under firm commitment versus best efforts, why the greenshoe exists, and what the lock-up expiry means for supply. Finally, be ready to argue both sides of going public: access to capital, liquidity for early investors and a market valuation, against listing costs, disclosure obligations and pressure from public shareholders.