The ABCs of IPOs
Feb. 20 -- Where do stocks get their beginning?
The proverbial longest journey starts with the smallest step, and so let's begin there, right at the beginning. A stock gets its start from the IPO, or initial public offering.
Simply, IPOs are the way in which privately held companies sell shares of their stock to the public for listing on an exchange. This process or event is what's known as "going public." While there are a good number of reasons why this is done, by far the most common one is to raise capital for the company's coffers.
Basically, IPOs can be divided into two categories: those that are self-underwritten, that is, where the company itself markets its securities without the assistance of an investment bank, and those that are underwritten by an investment bank or a group of investment banks, also known as a syndicate.
Now, I can't say with absolute certainty that there has never been a self-underwritten IPO that went on to become a highly valued and successful stock.
But I can say that out of the 6,000 or so IPOs that I have bought, sold, written about, watched or otherwise been made aware of over the course of my career, I'm unable to recall a single self-underwritten deal that made money for investors. Again, it could be that they exist and I just don't know of any. Having said that, it would be safe for you to assume that anything I say from this point on will be in reference to underwritten IPOs only.
Placing the Deal
OK, to further narrow our topic you need to know that there are two basic types of underwritten IPOs: best efforts offerings and firm commitment offerings. In a best efforts IPO, sometimes referred to as a mini-maxi deal, the underwriter sets forth a minimum number and a maximum number of shares that will be sold.
The underwriter will then use its "best efforts" to place the deal, but is not obligated to do so according to the underwriting agreement it signs with the company looking to go public. Without the minimum number of shares placed, these deals can simply be canceled.
