Tuesday, March 24, 2009

Initial Public Offering (IPO) Explained


What is an Initial Public Offering (IPO)? How does it help a company grow?


An Initial Public Offering (IPO) refers to the first time that an organization sells stock to the general public. An IPO allows an organization to sell securities in exchange for cash to invest in new projects. These securities provide funds for the organization to invest but require a rate of return to investors, which will be a future cost to the organization. An IPO allows an organization to grow financially because it provides immediate funds for the organization to use for new projects that will produce revenue-generating assets. This immediate availability of funds allows the organization to grow more rapidly than it would be able limited to its own revenue generating capabilities and limited access to immediate funds necessary to implement new projects.

A merger or acquisition may be a more appropriate way to grow due to combination of resources, tax benefits, debt potential, and market power. An IPO provides immediate cash to an organization but may not provide a significant advancement in the current stance of the organization. A merger or acquisition may provide the ability for an organization to eliminate ineffective management, combine resources, and utilize similar trade conduits. This restructuring may allow the organization to increase its financial position without using outside resources. The increase in size and unused debt potential associated with a merger may provide tax benefits that the two separate organizations did not receive that provide a significant savings for the organization. Finally, the merger may provide a significant increase in market share that increases the revenue of the organization faster than an IPO alone. Ultimately, acquiring or merging with another organization that already has projects and a structure in place that the other organization is looking at establishing can allow the organization to expedite their stance without using an IPO.

3 comments:

  1. Thanks for all the great info, I find it helpful towards advancing my financial education. Keep up the good work!

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