What is an IPO? In stock exchange news, information slips that a certain company has conducted an IPO. The word itself is an acronym and stands for Initial Public Offering (usually pronounced ipio), which means initial public offering. In simple terms, an IPO is a placement on the stock market. valuable papers companies to raise funds (usually this term, especially in Russia, means the sale of shares). As a result, it becomes available for purchase to all institutional and private investors, including foreign ones. Everyone can buy a certain share of the company for themselves.

What are the benefits for companies?

Almost all companies sooner or later face the problem of lack of funds for further development. There are several ways to obtain them:

1. Attracting loans from banks. The method is quite expensive, given the high interest rates. In addition, there are risks of not receiving or not receiving the entire required amount.
2. Issue of own bonds. This is a cheaper way to raise funds compared to loans. But still, this puts a strong debt burden on the operation of the enterprise. Payments on coupons over a long period of time significantly reduce his profit. And the principal debt (bond face value) will need to be repaid at maturity.
3. Attracting large investors. The most optimal, but also the most difficult way. The company may simply not find anyone willing to invest money in business development.
4. IPO on the stock market. Before listing, the company must undergo a number of assessment procedures. The procedure itself is complex and requires significant time and financial costs. Only established companies with good performance and development prospects can be allowed to IPO.

When a company goes public with an initial public offering, it usually has several goals in mind. The main thing, of course, is to attract Money, for business development. The new influx of money allows the company to reach a higher stage of its development and strengthen its position in the market. The money received from the sale of shares on the stock exchange goes to finance long-term projects and does not require their return in the future, as in the case of obtaining a loan or issuing bonds.

The second reason is to increase the capitalization and liquidity of its assets. As a rule, the company's value is significantly lower before the IPO. Public placement increases the company's credibility in the market, its brand becomes more recognizable. This makes it much easier to do business and enter into profitable contracts. As a rule, banks are more willing to provide development loans to such companies and at lower rates (the so-called risk premium).

Should a private investor buy shares in an IPO?

When a company enters the market, it does not officially have any history of its development. All financial indicators are hidden from a wide range of investors. And only after entering the stock exchange, the company is obliged to provide all reports on further financial activities. This is one of the main disadvantages for investors. Therefore, buying at an IPO is more like a lottery. Within a few days, stock prices are affected. Their value directly depends on the company's future development prospects in the eyes of investors. And the stronger these expectations, the higher demand we will see. All this can push prices far up. But as is usually the case, most investors tend to be wrong in their forecasts. Therefore, in the first days you can observe strong “swings”, when prices change by several percent (or even tens of percent) over the course of several days, both to higher and lower prices.

Already on the first day of placement, Alibaba quotes increased by 38.1%. The growth continued for several weeks, but then the quotes dropped even below the initial ones by almost 40%. And only recently, the price of Alibaba shares exceeded the initial one, but still reached the peak values ​​​​shown in the first days of placement on the stock exchange.

Within a year after entering the market, Alibaba's capitalization decreased by almost 60%.

Alibaba's capitalization fell within a year after the IPO

And only almost 2 years later the price level approached and then exceeded the quotes at the initial offering.

Alibaba chart since IPO

Therefore, for long-term investors it is better to wait until the excitement subsides a little and a fair price is established for the quotes.

For speculators or short-term traders, on the contrary, this is an advantage and an excellent chance to make money, due to, as described above, sudden changes in quotes, when high growth today can be replaced by a sharp decline tomorrow. It is on these strong fluctuations that you can make good profits.

The most profitable successful IPOs

According to statistics, the value of most companies after entering the market only increases in the long term. For example, Sberbank’s quotes have grown more than 1000 times, Google’s by 100 times, and Norilsk Nickel’s by 10 times. In an initial public offering, gigantic amounts of money are circulating, measured in billions of dollars.

There are even a few funds in the stock market that specialize only in buying companies during IPOs, such as First Trust IPOX-100. In terms of profitability, it exceeds the S&P 500 and NASDAQ indices. Since 2010, its value has increased 4 times!!!

Let's take a look at some of the biggest IPOs that have raised multi-billion dollars over the past 10 years.

1. Industrial and Commercial Bank of China - 22 billion in 2006
2. Visa - 17 billion in 2008
3. General Motors - 18 billion in 2010
4. Agricultural Bank of China - $22 billion (2010)
5. AIA Group - 22 billion in 2010
6. Facebook - 16 billion in 2012
7. Alibaba Group - $25 billion in 2014

Examples of failed IPOs

A striking example of a not entirely successful placement on the stock exchange is Facebook shares. In 2012, it was the most anticipated IPO of the year. But with an initial price of $48, when the market opened, there was a rapid collapse of quotes to $38. The stop was short-lived and the price subsequently dropped by another 25%. As a result, the overall drop was about 60%. True, now, after several years, the value of the shares has increased almost 3 times.

The second example is from the history of Russian IPOs. In 2007, the so-called people's IPO of VTB Bank was held. The share price at the initial offering was 13.6 kopecks. As a result, it was possible to attract 1.6 billion investments. But......the price above the placement price lasted less than six months and then the quotes began to fall. Since 2007, the price has not even come close to the original 13.6 kopecks per share. In the last 2 years they have been trading within 6-7 kopecks per share. And this is after almost a decade, when prices for everything, even taking into account inflation, have increased several times.

VTB share price chart since IPO in 2007

Initial Public Offering (abbr. IPO, initial public offering/placement). Distribution of a block of shares among external investors before their free circulation on the stock exchange. The placement of subsequent issues will be called a public offering or PO (Public Offering).

Today, the successful implementation of the initial public offering procedure on the stock exchange (IPO) allows us to bring the company to a new level of development. In the Russian stock market, the term IPO is sometimes also used for the public sale of shares of large shareholders on the stock exchange.

Benefits of an IPO

The process of transforming a company from a private company to a public company forms the following main goals of the IPO:

• Increased funding. Publicity of activities and its transparency for investors makes it possible to obtain external financing in an amount significantly exceeding the capabilities of the owners.
• Free determination of share price. Allows you to more adequately assess the current capitalization of the company for possible mergers or acquisitions.
• Free circulation. The possibility of free sale increases the value of securities;
• Significant increase in liquidity. The opportunities for private, public and bank lending, customer loyalty and other non-financial benefits increase;

As a result, the interests of all participants in the IPO should be taken into account as much as possible

Options for organizing an IPO

In financial practice, the following three options for organizing an initial offering are most often used:

1. Fix price. The second name is “open offer” - in this option, the value of the shares is known in advance. Applications will be accepted until the entire issue has been placed in full.
2. Determining the price through auction. Mainly used in treasury bond sales and privatizations. It is rarely used for IPOs of private companies, since there is always a risk of “under-placement”. Auctions are most effective for corporatizing large companies, data on which is widely available and can be obtained by all participants.
3. Order book. This option allows the underrider to fully control the IPO procedure - it looks something like this:
4. An initial price corridor (Price Range) is set, within which purchase orders are accepted. The range is recalculated depending on interest, that is, the final purchase price may be higher or lower than the original one.
5. The application, in addition to the number of shares to be purchased, indicates the maximum price (Limit Price) to which the buyer agrees. Additionally, applications are divided into three types:

   normal (Strike Bid)- the purchase is made at the final price;

   maximum allowable price (Limit Bid)- purchase only if the final price does not exceed a given level;

   Step Bid- the number of shares purchased changes depending on the rise or fall of the price;

For each individual issue, a separate method or combined schemes can be used: for example, the option “open offer (first tranche) + auction (all subsequent ones)” or “book of orders (first tranche) + open offer (second tranche)”.

Mandatory stages of an IPO

In this section we will briefly describe the main stages of the IPO process. This is a mandatory sequence, but the specific timing and details can of course be different for each company:

A decision is made to launch an IPO

Compliance with the mandatory requirements and procedures of regulatory authorities is a rather complex and lengthy process, and, as practice shows, it takes at least 1-2 years from the date of the initial decision.

Conducting a general meeting and creating a management body coordinating the IPO process

At the second stage, it is necessary to decide on an investment bank, as well as companies to conduct legal and financial audits. The bank, in addition to consulting and searching for potential investors, also takes on the functions of underwriting - guaranteeing the issuer to receive the pre-agreed minimum proceeds from the placement (“firm commitment”) or the sale of the maximum possible number of shares (“best effort”). Underwriting functions can be performed simultaneously by several companies or banks.

Creation of a prospectus

The preliminary version is submitted to the Securities Commission and in addition to financial statements confirmed by an independent audit, and must include all the necessary information for making a decision: in which markets the company operates, main competitors, business strategy for the next few years and other data.

The creation of the prospectus requires the participation of underriders, who will then use the information received to present the IPO to potential investors.

"Road Show" or "Road Show"

Slang for activities aimed at persuading clients to purchase shares of a future issue. Occurs in the form of negotiations on the sale of large packages, various meetings, advertising, media publications, presentations and other marketing events.

Overall success ultimately depends on how effectively this stage is completed. This is where the initial filling of the order book begins and the final quantity and initial price of securities are agreed upon. The result of all modifications will be the final version of the prospectus and, if necessary, a price amendment (Price Amendment).

Transfer of shares to start trading

No later than two days after the final version of the prospectus is adopted, the IPO is considered completed, and the shares are transferred to the management of the underriders. Free trading on the exchange begins the day after the end of the last distribution.

Completing the initial placement process

Once the shares are transferred to the underwriter and in the case of a “firm commitment”, he transfers the pre-agreed amount to the company, after which the transaction is considered completed. Seven days after the start of trading, the offering is officially confirmed as having taken place, and after another 25 days, a “silence period” ends, during which the underwriters are prohibited from publishing any forecasts or estimating the value of the company.

Placement on the stock markets of the USA and Europe

The US stock market is the largest and most liquid in the world, with a huge investment base allowing for initial public offerings of almost any size. For non-resident companies, access to the exchange is carried out using American Depository Receipts (ADR) - securities that give the right to own foreign securities, but are circulated only within the United States.

Legal regulation of the IPO procedure in the Russian Federation

The regulation of the initial public offering procedure is the responsibility of the FFMS (Federal Service for Financial Markets). The main regulatory documents are the laws “On the securities market”, “On joint stock companies" and "On the protection of the rights and legitimate interests of investors in the securities market." Most of the initial securities are traded on the united RTS-MICEX exchange. The diagram shows the initial placement procedure, which was used on the MICEX and is now used on the united Moscow Exchange.

Perhaps in the financial columns of news publications you came across information that a certain company held an IPO, after which the founders of this company became millionaires. But what is an IPO? Is this scheme really that beneficial for the company’s managers and its early investors? And what do IPOs have in common and different from the popular term ICO today? Below we will find out the answers to these and other questions.

What is an IPO? Initial public offering

An IPO is the first public offering of shares (IPO = Initial Public Offering) of a company for sale on a stock exchange. Often an IPO is also called an initial public offering, meaning the initial placement of shares on the stock market. Let's say we have a relatively small company. Let us further assume that this company wants to attract additional capital for some purpose (opening a new production facility, upgrading equipment, expanding to other regions, investing in related businesses, and so on). In this case, a closed company that meets a number of requirements can conduct an initial public offering of its shares and become public. This is the essence of an IPO.

IPOs in almost all countries of the world are regulated by the state. The laws of most countries require companies that want to conduct an IPO to change their status from private to public before offering shares. To prepare for the listing of shares on the stock exchange, at least $200,000 is usually required. In most cases, a public offering is required to attract new investments, which can be spent on various purposes. Companies can also do IPOs in order to protect themselves from being taken over by more major players. In addition, holding an IPO complicates the implementation of a raider takeover, since in this case the shareholders become the owners of the company.

Unfortunately, an IPO does not provide an objective market valuation the value of the company's assets. The fact is that during the initial public offering of shares on the stock exchange, the real value of securities may be overestimated; the overstatement is not caused by the objective state of affairs, but by the feeling of euphoria and optimism of the players on the stock exchange. These feelings are fueled by the party placing the shares - however, over time, the euphoria wears off and the market value of the shares begins to fall.

Also, before an IPO, various cunning schemes for assessing the value of a company can be used, with the help of which it is possible to inflate the real one (due to this, additional excitement is created, due to which the company’s shares may rise in price for a short time, but in the long term the value of these securities may decrease). For example, at the reporting stage, you can take into account all income in one accounting period, and all expenses in another; in this case, the company’s income will be overstated, although these incomes do not correspond to the real state of affairs.

Pros and cons of IPO

A company, by publicly conducting an initial offering of its shares on the stock exchange, attracts capital that it can use for the purpose of its development. It is easier for a prominent company with high assets and a large market capitalization to survive in the market, enduring downturns in activity and global crises. A successfully developing honest business (where, in particular, the rights of minority shareholders are respected) is beneficial to everyone: the company’s management, its investors, and the state. All companies had some kind of beginning and we can say that they all emerged from the IPO, like each of us emerged from childhood.

The disadvantages begin when the company itself or third-party organizations pursue the goal of “pumping up” the value of shares, i.e. convince everyone else that the company is worth more than it really is. This ends badly: the benefits from the pumping are concentrated in the hands of a narrow circle of people, and the majority of investors lose money and trust not only in the issuer, but sometimes in the stock market in general. For the state, of course, this situation is also unprofitable, since it is interested in the financing of enterprises by its citizens - it is no coincidence that in 2015 such a concept as . By the way, this type of account appeared just in time, when Russian index The MICEX, after many years of stagnation, has noticeably gone up.

Going public means the company is open and has stricter reporting requirements than before. As noted above, this disadvantage for the company is compensated by the increasing complexity of its takeover or raider takeover, which is especially significant for developing countries. The IPO procedure usually costs a lot of money - however, in the case of a well-structured business, they are more than offset by the amount of funds raised from investors. One thing is clear: whatever the disadvantages, going public is a natural step for a mature company and it is largely within its power to reduce the disadvantages for itself and increase the advantages of this operation.

The largest IPOs in Russia and in the world

Let's move on to the practice of initial public offerings and first consider the ten largest Russian companies that entered IPO from 2004 to 2014:

Now compare the chart above with the largest IPOs in the world:

What can you pay attention to in this table? The stock price was never negative after the first day of trading—and in six out of ten cases, it made double-digit gains. The reason has already been discussed - the party placing the shares, as well as the issuer itself, are interested in the excitement around the company, which in a very short period gives rise to speculative growth. However, if you look at the situation over the year, the picture changes - three out of ten companies found themselves in a fairly deep drawdown. In terms of capital raised, the world's largest IPOs turned out to be approximately an order of magnitude higher than the largest Russian ones.

IPO, SPO and FPO

Along with the term IPO, there is a similar term, SPO (Secondary Public Offering, i.e. secondary public offering of shares). An SPO occurs because the owners of a company always retain some of the unlisted shares after the IPO, but over time they may want to sell some of them, booking a profit. The sale is usually carried out through investment banks, which gradually release the shares into free float so that excess supply does not reduce the price. Of course, the bank includes its own commission in the service, so for the owner the profit from the SPO will most likely be lower than the market one. The market usually reacts positively to SPOs.

SPO should not be confused with FPO (Follow-on Public Offering), i.e. re-posting. Re-placement involves additional issue shares of a company that prefers to borrow not through bonds, but by sharing the rights to participate in the business. As a rule, this leads to a negative market reaction, since the new issue “erodes” the share of current shareholders and makes it possible to transfer influence over the company through gray schemes.

Stages of initial placement

The initial placement of a company occurs in several stages:

Preliminary stage. A company hires one or more investment banks to take its shares public. Of course, a company can independently organize an entry into the stock exchange, but in practice this is extremely rare due to the peculiarities of the IPO procedure. Investment banks assess the market value of the company, put documents in order, and so on. Investment banks then take ownership of about 10-15% of the company's shares at the offering price - so they are interested in stirring up investor interest in the issuer. Investment banks in this case perform the functions of an underwriter .

• Preparatory stage. At this stage, the underwriting bank performs the following functions: developing the IPO process, drawing up a business plan, checking the company for compliance with national and interstate standards and laws, getting rid of weak and non-core assets, and so on.

Actual implementation of the IPO. Now it is necessary to list the shares on the stock exchange. First, a so-called investment memorandum is drawn up, which indicates the following information - the total number of shares, the value of the share at the beginning of trading, the determination of the amount of dividends, and so on. Then the company is registered on the stock exchange and with government agencies. After registration, a powerful PR campaign is carried out, which should attract the attention of potential buyers of shares to the IPO. The IPO procedure has been completed.

Successful and unsuccessful IPOs?

When people talk about investing in an IPO, quite often they lose sight of the most important point - exactly for what period were the investments made? IPO issuers can be held for 1 day, three months, six months, a year, three, ten... for this reason, the concept of a “successful or unsuccessful” initial offering requires clarification.

In our analysis of the world's largest IPOs, we have already noted the fact that all shares grew on the first day of trading (although sometimes it was close to zero), as well as the reasons for this growth. University of Florida professor Jay Ritter, studying all IPOs over a 22-year period in the United States - from 1980 to 2012, almost 8,000 IPOs - noted about 18% average return for participation in each public offering with a sale at the end of the first day. British IPOs using the same scheme from 2000 to 2014 yielded approximately two times less - 8.5%, but the income trend was confirmed. This is perhaps the best long-term speculative strategy that I know of.

In other cases, timing becomes very important. Consider Alibaba Group - the first IPO of this company was held back in 2007 on the Hong Kong Stock Exchange and only in the fall of 2014 on the New York Stock Exchange:

Alibaba Group. A Chinese company that is involved in the field of Internet commerce. This business structure includes companies such as AliExpress, Taobao and others. The IPO was made in September 2014 at a price of $68 per share the day before trading began.

As can be seen from the table above, after the first year the loss of investors was about 30%. Failed IPO? Let's look at the current quotes:

Consequently, the stock returned to its initial exchange price only almost two years later - however, today the stock is trading around $175, which is quite good relative to the offering price and the time since the IPO began. The situation is very similar with another company from the top ten largest IPOs:

Facebook. Transnational social network. The IPO was made in 2012; the starting price of one share is $38. A few months later, the share price fell sharply. By mid-2013, the situation improved and today the price of 1 share is about $170.

In total, two companies with a drawdown of about 30% in the first year would still be a successful investment today. Apparently, it is worth talking about clearly unsuccessful IPOs only in the case when the share price does not exceed the offering price more than five years after the IPO. Two examples are suitable: Russian companies:

"Protek." A Russian company that is involved in the production and distribution of medicines. The Russian IPO was carried out in 2010, the starting price of the share was 120 rubles per share. A few months later there was a serious collapse, the stock sank six times. Although the share has almost tripled over the past three years, the cost of 1 share of Protek today is only at the level of the offering price. In dollar terms, because of the ruble, the ratio is noticeably worse: $3.5 at the start versus $2 today.

VTB. Russian commercial bank. The IPO was held in 2007. The initial share price was 13.6 kopecks. For some time, the share price rose, but after some time there was a serious collapse that is still ongoing. Today the cost of 1 VTB share is about 5-6 kopecks.

Diversified Products

Up to this point we have mainly talked about individual companies who listed their shares on one or another exchange. However, it is known that the best friend of a smart investor is . Therefore, it will be very interesting for a reasonable investor to monitor how the population of companies that have entered the IPO behaves.

A 2015 study by Dimson and Marsh found that there is a clear relationship between the time since a company's IPO and the performance of the corresponding index:

In other words, mature and stable businesses (in fact, a stock market index) at a distance of 35 years provide approximately a threefold advantage over young companies that drop out of the index after three years or less. The advantage of the latter is visible only in 2000 at its peak - when many young IT companies appeared and were in great demand among investors. Thus, based on the results of this study, trying to beat the market with young companies does not seem to be a good idea.

Exchange-traded funds at IPO

However, no one is stopping us from conducting our own research, for which we can use ETFs. I know of four funds that work with initial offerings:

• First Trust US Equity Opportunities ETF (FPX)

• Renaissance IPO ETF (IPO)

• First Trust International IPO ETF (FPXI)

• Renaissance International IPO ETF (IPOS)

The liquidity of the first fund is tens of times higher than the others:

Therefore, we will consider the FPX fund in more detail. It is based on the IPOX-100 index, which includes the 100 companies with the largest market capitalization that have carried out IPOs recently. The market capitalization of companies must be at least $50 million, and at least 15% of shares must be offered for placement. The index should exclude companies whose shares have risen by 50% or more in the first days, due to frequent weakness in subsequent performance. The limit for each share is no more than 10% of the market capitalization of the IPOX-100 index. Companies are included in the index on the seventh day of trading after the initial offering and are excluded after 1,000 trading days.

The FPX fund has been operating since 2007 - what results has it shown in comparison with the SPY exchange-traded fund, i.e. American market?

Contrary to expectations, here we see rather the opposite picture than in the previous case - throughout all 10 years, including the 2008 crisis, the FPX fund performed better than the market and produced more than twice the profitability. It is likely that the restriction adopted in the index to exclude issuers that were growing strongly at the start contributed to better profitability. Nevertheless, we should not forget that it is impossible to find an instrument that constantly outperforms the market. This can be illustrated by a second exchange-traded fund with the ticker IPO.

According to the fund's strategy, the Renaissance IPO Index includes approximately 80% of newly public companies, is capitalization weighted and imposes a 10% asset cap. Some IPOs are added in real time, others during the quarterly index revision. Companies are deleted two years after their listing date. Thus, the fund is similar to the previous one - although there is no limit on the initial growth of shares, and they themselves drop out of the index about a year earlier.

The fund is noticeably younger than the previous one - it was launched in the fall of 2013 and its liquidity is still low. The graph clearly shows a strong drop in the index in the second half of 2015, which was associated with the drawdown of large issuers and their large share in the index. The result is appropriate - the fund noticeably lagged behind the American market.

Whether it is worth investing in IPO funds based on this is an open question. History confirms the possibility of good results over a 10-year period, but this was a very favorable period for the market. The emergence of a fund that will only hold shares for the first day looks interesting - it seems that this strategy has a very good chance of long-term success.

How to identify a problematic IPO?

Forbes analysts believe that a problematic IPO can be identified by the presence of the following situations:

• Reporting documents show that the growth rate of profit over the past several periods is unusually high, and company representatives predict that the growth rate will continue.

• The company exploits the “fashionable” trend without a clear business plan when its popularity is lost.
  

• The company is quite young, and its operating results do not inspire optimism.

Comparison of IPO and ICO

ICO or Initial Coin Offering is an analogue of an IPO with the only difference that instead of shares, special cryptographic tokens are used, and these tokens are sold on special crypto exchanges. Those. ICO is implemented in the form of a company issuing its own special type of cryptocurrencies, which are called tokens. Once issued, ICO tokens are listed on a cryptocurrency exchange, where they are purchased using standard cryptocurrencies (often, but not always, currency). Cryptocurrencies are very volatile, so the cost of an ICO token greatly depends on their exchange rate.

The main differences between IPO and ICO are presented in the table:

Parameter	IPO (sale of shares)	ICO projects (sale of crypto shares)
Volume of costs	To enter the European exchange you need at least $200,000	To enter crypto exchanges you need about 10,000 - 20,000 dollars (that is, 10-20 times less)
Legal form	Various legal forms that correspond to the company's jurisdiction	There is no organizational structure. Functioning occurs due to the trust of project participants in each other.
Business model	Different business models of traditional economics	They operate according to the schemes of decentralized autonomous organizations (the so-called DAO model)
Control and regulation	Strictly regulated by the state. There are criminal penalties for violating IPO laws.	The regulator is the government, not the state. Due to the peculiarities of blockchain functioning, it is extremely difficult to initiate a criminal case, and to date, not a single person has been brought to justice for violating the rules of working with ICO.

It is clear that for all the above positions, participation in an ICO today represents an incomparably greater risk for an investor than an IPO. At the end of July 2017, the American regulator published an official statement according to which the ICO procedure falls under federal securities law, and tokens should be equated to shares. However, the SEC is just beginning to control this area, where, against the backdrop of the rapid growth of Bitcoin, promises of tens and hundreds of percent profit per month are already being met.

Initial Public Offering (IPO) - made for the first time, a public offer to investors to become shareholders of a company - is a complex set of organizational, legal and financial procedures, in which, in addition to the company itself and potential investors, many intermediaries are involved. The goals of the main participants in the IPO do not always coincide; each of them, in the process of preparing and conducting the IPO, faces its own problems and solves its own problems, however, they are all interested in each other, interested in making the IPO take place. Therefore, the whole complex of IPO problems should be considered from different points of view - the issuing company, investors, intermediaries.

The relevance of the IPO issue for the issuer is mainly focused on the issues of choosing an IPO scheme, choosing a trading platform (country) on which the placement will be held, choosing an underwriter, carrying out a set of measures to restructure the company, disclosing information about the company both during the IPO and after him. The main goals of a company in an IPO are to attract long-term financial resources to the maximum extent, create and maintain the status of a public company. An important point is to minimize the costs of preparing and conducting an IPO.

The main goal of a potential investor is to obtain maximum income in the future with minimal risk, diversification of the investment portfolio. Therefore, during the preparation and conduct of an IPO, the most important for an investor is the range of problems associated with an accurate assessment of the company’s prospects, market risks associated with its activities, and specific risks associated with conducting IPO transactions - both financial and legal.

The main intermediary between the company and investors is the underwriter. The main goal of the underwriter is to conduct a successful IPO, the results of which would satisfy both the issuer and the investors who received new shares. The main tasks of the underwriter are choosing an IPO scheme, analyzing the issuer, preparing and implementing all legal procedures, information support, attracting investors, organizing the work of other intermediaries who help in the process of preparing and conducting an IPO. The key point in the underwriter’s activity is determining the offer price of shares. For almost any intermediary, the financial result of an IPO is predetermined, so often the main result for any intermediary is the reputation of a reliable partner.

The possibility of interaction between these main groups of participants is largely determined by the regulatory framework, the activities of regulators, and the level of development of market infrastructure. And the development of the financial market in the country and the economy as a whole largely depends on how successfully these groups of participants interact with each other.

1. Deciding on an IPO

All this creates stable preconditions for the massive entry of large and even medium-sized Russian companies into the primary capital market. However, these prerequisites are a necessary, but by no means sufficient condition for making a decision on an IPO. Based on the global experience of initial public offerings, it is believed that a company must reach the required size, have good development prospects in its industry, show positive dynamics in key financial indicators, while profitability is not at all necessary. Do these conditions apply in Russia? Are there specific Russian factors influencing the decision to make an IPO? For example, the desire to “whitewash” assets acquired during privatization is often cited as such a factor.

How important is the industry affiliation of companies going public for Russia? Following the collapse of the hi-tech sector, investors around the world are very wary of stock offerings in the information technology and biotech sectors. Russian candidates for IPOs mostly belong to classical sectors of the economy, but the state has announced priority development of high-tech sectors of the economy. Can government support contribute to a particular company’s decision to launch an IPO? What should the government do as part of improving the regulatory framework so that entering the primary stock market becomes commonplace for Russian companies?

If all the conditions for a decision on an IPO of a particular company are present, then who - the owners or top managers - become the initiators of such a decision? When making a decision on an IPO in Russian conditions, is there a “conflict of interest” between the company’s owners and managers, which is given a lot of space in modern economic models of the company?

2. Selecting a site for an IPO

• Russian trading platforms (MICEX, RTS)
• Foreign trading platforms (LSE, NYSE, NASDAQ, DB)

A company that has decided on an IPO has the opportunity to place its shares either in Russia (on the MICEX, RTS, St. Petersburg Exchange) or abroad (most often the LSE, NYSE, NASDAQ). What factors determine the choice of site for an IPO? Who makes the decision on choosing an exchange and how big is the role of financial intermediaries accompanying the IPO of a given company in this matter?

It is often suggested that some features Russian legislation on the securities market make IPOs on Russian stock exchanges such a legally complex and lengthy process that it is much easier and faster to place them abroad. This thesis is actively used by foreign auction organizers, some of them have even created special divisions to work in Russia and the CIS countries. However, if we take into account the costs of placement, then estimates show that when placing in Russia, the company's costs will be an order of magnitude lower than when placing abroad. For smaller companies, this may be a deciding factor.

Many Russian companies quite rightly fear that the Russian market, due to a lack of investors, is not able to accumulate large funds to purchase the offered shares at a “fair” price, without a large premium for the size of the placement. The outcome of the IPO in this case will depend too much on market conditions and great skill is required to guess the favorable moment for the placement. How justified are such fears? In addition, the weakness of the Russian market has some companies wary of the possibility of a hostile takeover during an IPO in Russia. On the other hand, by entrusting its shares to foreign shareholders, the company takes on country risks - if they lose confidence in the country, foreign shareholders will get rid of the company's shares, which can sharply reduce its capitalization.

Other factors influencing the process of choosing a country of location are also mentioned - long-term goals of the company’s strategic development, industry affiliation, country (region) of main activity, issues of prestige, etc. In addition, any company is interested in high liquidity of the secondary market for its shares; this is also important when choosing a site for an IPO. How important are these factors for Russian issuers?

A separate issue is the interest of trading organizers and other professional participants in the securities market in attracting companies to IPOs. So far, Russia has not been able to create an effective market infrastructure suitable for easy access to capital for new young companies, and the imperfection of the regulatory framework plays a significant role in this.

3. Formation of a placement team

• Investment bank
• Law firm
• Audit firm
• PR agency
• Consultant

The core of the IPO team is the company itself - the current shareholders, who make the decision on the IPO, as well as top management, who is responsible for preparing information about the company and directly interacting with other team members. However, the leading role in the team belongs to the lead manager (underwriter), who is usually a large investment bank.

The underwriter prepares analytical materials, develops an IPO plan and scheme, coordinates the work of all team members, interacts with regulatory authorities, creates an order book, guarantees placement, supports the market after the IPO, etc. Choosing the right underwriter largely determines the success of an IPO. What should and can be used as a selection criterion? The cost of services and the timing of the project, the presence of an extensive investor base, an experienced team with high analytical capabilities, reputation, financial resources to implement the issued guarantees - what is more important? How important is the bank's experience with this company? Are the requirements for an underwriter different for an IPO on the foreign market and in Russia?

Legal support of the project plays an important role in the process of preparing for an IPO. What factors are most important when choosing a law firm – experience, reputation, international practice? In whose interests should lawyers act - in the interests of the issuer or in the interests of potential investors? Is there a conflict of interest and how is it resolved?

The role of the auditor is nominally limited to confirming the reliability financial statements the issuer in the information memorandum and prospectus, and for an IPO of a Russian company aimed at Western investors, reporting is required both according to Russian standards and IFRS. Despite the nominal role of the auditor, the success of the IPO largely depends on the level of investor confidence in the audit. Is the high reputation of the audit company sufficient, or do other factors need to be taken into account when choosing an auditor?

Engaging a financial consultant for an IPO in Russia is now voluntary, although foreign exchanges require that the team has a special advisor with whom the exchange interacts. To what extent has the abolition of the requirement for a mandatory consultant made it easier for companies to enter the Russian market? What additional benefits can hiring a financial advisor provide? What requirements must a company providing such services meet?

An information campaign (interaction with investors and the media, presentations and road shows) can be carried out both by an engaged professional PR agency, and with the help of PR, IR departments of the potential issuer itself or the underwriter of the placement. What are the pros and cons of these two options in terms of the end result? What factors should a company consider when choosing a PR agency?

Each member of the IPO team can pursue their own local goals, the challenge is to align all their actions with the main goal of a successful IPO. The professional reputation of all participants in the placement depends on this. However, is there a possible conflict of interest? What can regulators do to prevent these types of conflicts?

4. Preparing the company for public status

• Due diligence of the issuer
• Preparation and audit of financial statements
• Legal examination of business
• Assessment of technological and human resources potential
• Marketing activity analysis

The public status of a company implies the formation of a comprehensive, objective picture of the company (due diligence); this is a necessary condition for a successful IPO. The procedure for forming an objective view requires efforts, first of all, from the issuer himself. What aspects of the company's activities must be disclosed and to what extent in order to be able to talk about the issuer's sufficient publicity - company structure, capital and asset structure, shareholders, financial condition of the company, market and specific business risks, corporate policy, development prospects?

First of all, transparency of the legal structure of the company is considered as a necessary condition for publicity. To attract potential investors, it is necessary to disclose and justify the necessity and interconnection of all structures included in the company. It may be necessary to restructure it - to create a company with clear connections and consolidated reporting. For Russian companies that have acquired assets through privatization or mergers and acquisitions, additional due diligence may be required to assess the potential for litigation and tax claims. How important are these specific conditions for Russian companies related to the recent turbulent political and economic processes in the country? Is the company structure and ownership structure important for investors?

An indispensable condition for publicity is the preparation of consolidated financial statements of the company in accordance with Russian and international standards and their audit. Obviously, the company will strive for satisfactory indicators of profitability, liquidity, structure of assets and liabilities. Are these measures sufficient for a successful IPO and what are the key indicators? Do potential investors pay attention to other, non-financial performance indicators of the company?

IN last years investors around the world are becoming more attentive to the assets of the company offering its shares. The presence of efficient production and modern technologies is often valued higher than intangible assets and industry prospects. Much attention is paid to top management - sometimes companies going for an IPO specifically introduce managers who have already conducted successful IPOs into the executive management.

It is believed that an important factor in an IPO is whether the company has prospects in the sector of the economy in which it operates. Marketing analysis of activities, carried out by the company itself or by external specialists, may lead to the need to change the product range and make decisions about introducing new products or services to the market, changes in the structure of suppliers and consumers, and the creation of new divisions in the company structure. What factors determining the company's prospects are of paramount importance - brand recognition of the company, the company's market share, modern production technologies, a strong management team, a clear development strategy, high quality operational management? How to evaluate these factors?

5. Improving corporate governance

• Business valuation
• Increasing investment attractiveness and reorganizing the company
• Optimization organizational structure Compliance with the best principles of corporate governance

During the preparation of a public offering, the lead manager organizes an assessment of the company's business to establish an initial range for the stock offering price. For Russian companies, assessment is complicated by the fact that the domestic market is developing, and this significantly complicates the preparation of reliable forecasts for income and risks. Therefore, to evaluate a company, along with the discounted cash flow method, a comparison method with similar companies operating both in Russia and abroad can be used. Which method is preferable? Are there other assessment methods? What other features should be taken into account when assessing a Russian business?

The resulting assessment of the existing business may not satisfy the issuer, but its implementation can identify bottlenecks and suggest possible ways to reorganize the company. Business restructuring and the withdrawal of non-core assets from the company will quite possibly lead to financial recovery company and achieving better business performance indicators: sales volume, unit costs, profitability and profitability, liquidity, structure of assets and liabilities. Almost all of these indicators can be optimized by appropriate organizational measures. Which of these indicators are key from the point of view of the company's investment attractiveness? It is also extremely important that the company has a good credit history. The development of such a history may require debt restructuring, a number of promissory notes or bond programs, which will further increase the company’s “recognizability” by investors.

Business restructuring is usually accompanied by a change in the organizational structure of the company. Most often, asset management is concentrated in a management company, which becomes the investment core that attracts investor funds to the market. Is such a restructuring required and what could be the organizational form of a company going public?

A public company entering the market is required to adhere to certain standards of business ethics in relations with shareholders - “standards of best corporate governance practices” (CG). The company adopts these standards voluntarily; they are determined not so much by legislation as by the peculiarities of the business culture of the country in which investments are attracted.

Russian legislation in the field of corporate governance is limited to the requirements for a company to be listed on a stock exchange (usually the next stage after an IPO). On the other hand, the concept of “best corporate governance practices” does not establish any exhaustive list of activities. However, it is considered that the declaration of the company's management's commitment to the principles of "best practice" CG, the effective functioning of the Board of Directors and its interaction with executive bodies companies, respect for shareholders' rights, and information transparency of the company are necessary conditions for entering an IPO. How important are these conditions in Russia? Are there any differences in best practice CU in Russia and abroad? How significant do Russian and foreign investors consider these conditions?

6. Formation of a syndicate of underwriters

• Underwriting

The functions of an accommodation organizer are so multifaceted that he often cannot cope with them alone. Therefore, functions are distributed among several investment banks, forming a kind of syndicate with certain areas of responsibility. The main lead manager of the syndicate is the investment bank, which oversees the entire IPO process, attracts co-organizers to expand the circle of investors, whose task is to provide information to their clients - potential investors, collect applications for shares, and maintain interest in shares on the secondary market. In addition, a group of dealers can be formed to distribute shares more efficiently. What requirements do the lead manager and the issuer place on the co-organizers of the placement - experience in this market, experience in conducting IPOs, a wide client base, established connections with other investment banks, analytical, legal and information resources? Does the structure of the syndicate depend on the placement scheme, the issuer's industry, and the size of the company going public?

The formation of a syndicate of underwriters is accompanied by the signing of a number of contracts - agreements with underwriters and dealers. The key point is the underwriting agreement, which the issuer enters into with the lead manager, and which determines the method of placement of shares in the IPO.

A separate issue is the determination of the cost of underwriting services and the structure of cost distribution within the syndicate of underwriters. The underwriter's remuneration may be fixed or depend on the capital raised during the IPO process. What factors influence the amount of remuneration when placing in Russia and abroad? How high is the competition in this service sector in Russia and abroad? Why do Russian issuers attract foreign investment banks as organizers, despite the higher cost of their services?

7. Legal support

• Preparation of (additional) issue of securities and prospectus of securities
• Examination of transactions concluded during IPO

A company's entry into the market is a legally regulated process. It is necessary to fulfill a number of conditions and prepare a number of necessary documents required by the authorities regulating the activities of the securities market, the organizer of trading, and in some cases, self-regulatory organizations. Preparation of documents is a complex legal process in which both the company itself and the lead manager take part. Often, a specially invited law firm participates in the legal support of an IPO.

The most important stages of legal support in the process of final preparation for an IPO are the development of a placement scheme and the preparation of an issue prospectus. Russian legislation significantly complicates the process of initial placement, so the lead manager can offer the issuer and investors such placement schemes that allow optimizing procedures associated with the presence of some inconvenient legislative restrictions, for example, the preemptive right of existing shareholders to receive shares as part of a new issue, determining the price shares, report registration. Obviously, such optimization must be carefully verified legally. When IPOing abroad, the role of legal advisors for Russian companies is even more important. For example, in the United States, the issue must be registered under the securities laws of the state in which the company intends to transact its securities, and the differences in the nuances of the law can be significant.

Since lead managers often use complex initial public offering schemes, the process of transferring ownership rights to new shareholders and funds from investors to the company can consist of many stages, each of which must be legally clear. Therefore, the examination of transactions concluded during an IPO is an important condition successful preparation of the company for entering the market, a certain guarantee for investors and the issuer. Upon completion of the IPO, legal consultants from both the issuer and the underwriter prepare opinions specifying the procedure for transferring ownership rights, and an independent accountant provides an opinion that all transactions were carried out correctly from a financial point of view. Are there significant differences in the implementation of these procedures in Russia and abroad and in what ways? regulations Are these processes regulated?

8. Information support

• Preparation of an information memorandum
• Preparation of a competent public report
• Preparation of an investment memorandum
• PR support
• Road Show
• Investor relations

The main task of investment banks participating in the initial offering is to attract a wide range of investors. This can only be done by providing maximum information about the company so that investors can fully assess the expected returns and risks of investing. Information support for potential investors has a number of features - the dissemination of information about important events of a potential issuer should be carried out almost in real time, wide territorial dissemination of information should be ensured - both in Russia and in global financial centers, information activity should be very high, especially immediately before the IPO.

The most important component of information support for an IPO is the preparation of an information memorandum, which provides comprehensive information about the company’s business and the prospects of the company and the industry as a whole, the company’s structure, shareholders, management bodies, corporate policy, the company’s financial condition, risk factors, etc. d. Companies targeting foreign investors include in the information memorandum information about Russian legislation in the field of the securities market, tax legislation, information about the Russian stock market, etc. Although the range of issues disclosed in the document practically does not change from company to company, nevertheless, Each underwriter approaches the preparation of the memorandum, taking into account both the individual characteristics of the company and the circle of investors to whom the shares will be offered.

The process of information support for entering an IPO begins with premarketing - searching for a circle of potential investors, identifying investors' interest in the company's shares. The results of premarketing should be as objective and reliable as possible; both the company itself and the syndicate of underwriters are interested in this.

The next stage of information support is the organization of a road show. This is the most striking stage, which each company solves in its own way. The main difference between this stage and premarketing is the composition of participants - the road show involves the top officials of the company. The success of the road show determines the number of investors and the applications they submit, and ultimately greatly influences the final offering price. Compilation of the order book completes the information process of preparation for the IPO, as a result of which the exact offer prices of shares appear in the investment memorandum.

At all stages of the process of preparing for an IPO, a certain positive information background is maintained in the media, the activity of which depends on the degree of publicity of the company and the recognition of its brand. The extent of information activity in the US is regulated by law to ensure that investors are not subject to undue pressure, and companies strictly adhere to SEC rules even if the offering does not take place in the US. However, in 2006 serious changes will come into force in this area that may affect the content and activity of information support.

It cannot be assumed that with the end of the IPO and the successful placement of shares, the company’s information activities can be curtailed. The publicity of a company imposes on it certain obligations to disclose information. However, more importantly, the company's capitalization now depends heavily on investor confidence, which must be constantly won over and over again. Therefore, companies usually create special services (IR departments) to make interaction with investors as effective as possible. How should the company’s work with investors be structured, what should become the criterion for the successful work of the company’s IR services?

9. Features of the placement of securities during an IPO

Strictly speaking, almost all placements carried out by Russian companies are not IPOs in the full sense of the word. Due to the complexity of Russian legislation in Russia, an IPO is understood to be the implementation of existing shares, often combined with the issue of a new issue to replenish the share of “old” shareholders in the authorized capital. This IPO scheme is more complex and contains certain risks and tax restrictions. Is there currently an “optimal” placement scheme in Russian conditions? Will the placement schemes change after the adoption of a number of amendments simplifying the IPO procedure?

The principles for the placement of securities in an IPO are specified during the selection of an underwriter and the conclusion of underwriting agreements. There are two main principles of placement - when the underwriter makes a firm commitment to the price and guarantees the entire volume of placement, the second - when placement is carried out on the principle of “best efforts”. Each option has its own pros and cons for the issuing company. How much impact can the presence of certain clauses in the underwriting agreement, such as an all-or-nothing clause, have on the placement?

When placing, it is important to develop in advance a technique for conducting transactions, taking into account the existing infrastructure: a method of depositing funds and securities, a method of conducting an auction, the possibility of placing on several trading platforms, the possibility of combining exchange and non-exchange placement, etc. This process involves not only the issuer and underwriters, but also representatives from the organizer of trading and other professional market participants (Settlement and Trading Chamber, depository, registrar).

Often in Western markets, when placing new shares, special mechanisms are used to stabilize the share price during the initial period of secondary trading, and the terms of use of these mechanisms are pre-agreed in the underwriting agreement and announced to investors in advance. The most widely used mechanism is green shoe - a kind of option that gives the underwriter the right to buy an additional number of shares in case of high demand from investors. Are similar mechanisms used for placements in Russia and how beneficial are they for the issuer?

10. Analysis of completed IPO transactions

After the completion of the IPO, with the release of shares to the secondary market, it becomes possible to evaluate how successful it turned out to be. First, for the issuer, an obvious sign of success is the interest that the shares aroused among investors - the volume of demand recorded in the underwriter's book, and the excess of the final price over the estimates given in the memorandum (prospectus).

However, many believe that the criterion for a successful placement is the emergence of a liquid stock market and a sharp increase in the price of shares in secondary trading. It is obvious that in this matter the goals of the issuer and investors are directly opposite - investors, and often the underwriter, are interested in a high premium for the initial placement, while the issuer is interested in the opposite. It should be noted that the effect of “lowering the offering price” is typical for all markets, and Russian IPO companies are no exception. On the other hand, it can be argued that a sharp decline in the price of a company's shares is clearly regarded as a negative sign, since even the actions of the underwriter could not prevent the price from falling.

In addition, there are other factors that you should pay attention to, such as the structure and composition of investors. Some estimates place the number of investors typically receiving shares in a typical IPO at less than a thousand. If the shares were purchased by speculative investors, the secondary market will be liquid, but prices may be quite volatile. If the shares were purchased by funds, then, given the length of their investment horizons, this will negatively affect liquidity, but will stabilize the price. The issuer company must decide on the circle of potential investors at the stage of selecting a lead manager, and if the circle of investors who purchased the shares did not meet the expectations of the issuer and underwriter, such placement can hardly be called successful.

A group of analysts led by A.V. Demchenko - General Director of the Institute of Stock Market and Management

• Leadership and Management

What is an IPO? Goals, organization and implementation

In the trading environment you can often hear the term “ IPO" Some market participants managed to earn large sums from participating in it. So what is it?

What are the goals of the management of a company entering stock market, representatives of auditing and law firms, investment banks? What advantages do large investors have?

Let's take a closer look at the concept, goals, benefits of all participants in the process and the main stages of Initial Public Offering. We will also give some useful recommendations for beginners.

What is an IPO? Organization and objectives

IPO(Initial Public Offering) - this is the initial public offering of shares on the stock exchange . It is preceded by stages of preparation and organization, which take from several months to a year. First, a complete auditing to identify obstacles and shortcomings. After eliminating them, preparations for entering the stock market begin:

1. Investment banks (underwriters) are involved in organizing the upcoming event;
2. Negotiating between company management and representatives of the underwriter(s);
3. Upon completion of negotiations, an agreement is signed between the issuer and the underwriter(s);
4. The latter send an investment memorandum to the regulatory authority of a certain country;
5. The state regulator checks the information in the memorandum and, if necessary, may request additional data);
6. After receiving permission from the regulator, the company’s IPO date is set;
7. The investment bank (banks) begin an advertising campaign (Road Show) to attract the attention of investors and achieve favorable conditions for placing securities;
8. Some investors and bank representatives purchase shares before the start of official trading, making money on the difference;
9. If the company is promising, competition begins between brokers, exchanges and investors;
10. The final price, date and place of the initial placement of securities are established.

An initial public offering of shares on a stock exchange is carried out to raise money for development, business diversification or infrastructure creation. It is a new step in the company's development process. Entering the stock market is expensive and prestigious, so not all companies can afford this method of attracting investment funds. Other benefits include:

• The ability to reward leading specialists with options;
• Facilitating the poaching of specialists;
• Increasing the number of investors, the volume of investments;
• Increasing the level of trust in the company;
• The ability to use securities as a means of payment during an acquisition/merger.

We should not forget that an IPO makes a company public. The consequence is close monitoring by government regulators, stock exchange representatives, investment banks, traders and investors.

Marketing is made easier, but owners are subject to updated requirements regarding organizational structure and financial reporting.

What information does the memorandum contain? Meaning of Road Show

During negotiations between the company's management and investment banks, a preliminary price for shares, their type (ordinary, preferred, etc.), and the total amount to be raised are agreed upon. The memorandum that underwriters provide to the state regulator contains information about:

• Details of the upcoming IPO;
• Financial indicators of the issuer;
• Lives of leaders (biographies);
• Existing legal/financial problems of the company;
• Purpose(s) of raising funds;
• Current shareholders of the company (list).

Investment banks invest their own funds in organizing the issue and buy part of the securities before the start of official sales. Thus, they make money on the difference. If the shares are placed successfully, their price will increase.

The Road Show is initiated by the underwriters. It is a PR campaign conducted to increase interest in the issuer and the upcoming event. At the same time, large investors are also invited to buy securities before the start of official trading (allocation).

Small private investors and traders do not have this opportunity. After this stage is completed, the final price is set, and the result of entering the stock market becomes more obvious.

Upcoming share placement: prices, competition between market participants

The final price of securities depends on the general market situation, the results of the Road Show and the prospects of the company itself. If it has great growth potential, the starting price will be high (compared to other IPO), and there will be competition between market participants.

Representatives of various exchanges and brokers will offer Better conditions. For the exchange, the emergence of a new promising issuer is beneficial, since the overall liquidity of assets, the level of its capitalization, and trading volume will increase. The broker, in turn, will be able to receive large commissions.

Why do Russian companies conduct IPOs on American exchanges?

Many Russian companies conduct initial public offerings on one of the American exchanges (NYSE, NASDAQ, AMEX). This is due to the fact that the greatest concentration of capital and the largest trading volumes are concentrated in the American and European markets.

American and European investors are reluctant to enter the markets of post-Soviet countries. And local entrepreneurs prefer to store available funds in foreign banks and offshore companies.

Also among the arguments in favor of the American market are its civility, a reliable legislative framework, and a money-back guarantee. Profitability, reliability and access to objective analytics (specialized media receive guaranteed royalties from brokers) are becoming the main reasons for choosing the American stock market.

To make money from issuing shares, you need to choose the optimal moments to buy and sell assets. At the beginning of trading, strong price fluctuations are felt, and there is a struggle between traders and investors.

If you have no experience in trading these assets, it is better to refrain from active actions at the beginning of trading. Watch supply and demand. Open a position when the price becomes more or less stable.

Previous injections from strong players will lead to the inevitable development of the issuer and an increase in the value of its shares. Traders and investors will still have plenty of opportunities to make money.

At any time you can get prompt advice from our employee. We also suggest going through trading training to start trading with the necessary knowledge. Be successful!