Initial Public Offerings

After a successful offering, the underwriter meets with all parties to distribute the funds and settle all expenses. At that time the transfer agent is given authorization to forward the securities to the new owners. An IPO closes with the transfer of the stock, but the terms of the offering are not yet completed. The SEC requires the filing of a number of reports pertaining to the appropriate use of the funds as described in the prospectus. If the offering is terminated for any reason, the underwriter returns the funds to the investors.

IMPROVING THE PROSPECTS FOR A SUCCESSFUL IPO

For most businesses, the decision to go public is made gradually over time as changes in the company's performance and capital needs make an IPO seem more desirable and necessary. But many companies still fail to bring their plans to sell stock to completion due to a lack of planning. In an article for Entrepreneur, David R. Evanson outlined a number of steps business owners can take to improve the prospects of an IPO long before their company formally considers going public. One step involves assessing and taking action to improve the company's image, which will be scrutinized by investors when the time comes for an IPO. It is also necessary to reorganize as a corporation and begin keeping detailed financial records.

Another step business owners can take in advance to prepare their companies to go public is to supplement management with experienced professionals. Investors like to see a management team that generates confidence and respect within the industry, and that can be a source of innovative ideas for future growth. Forming this sort of management team may require a business owner to hire outside of his or her own local network of business associates. It may also involve setting up lucrative benefit plans to help attract and retain top talent. Similarly, the business owner should set about building a solid board of directors that will be able to help the company maximize shareholder value once it has become a public entity. It is also helpful for the business owner to begin making contacts with investment banks, attorneys, and accountants in advance of planning an IPO. In 1997, Evanson recommended using one of the "Big Six" accounting firms based on their trustworthy reputations nationally. Unfortunately, the reputations of these firms took a hit in 2001 and 2002 with a string of high-profile bankruptcy filing. Serious allegations of accounting fraud followed and extended beyond the bankrupt firms to their "Big Six" accounting firms. In 2005, the ranks of the "Big Six" accounting firms had been reduced. The remaining "Big Four" accounting firms are: Deloitte & Touche, Ernst & Young, KPMG Peat Marwick, and PricewaterhouseCoopers.

Businesses interested in eventually going public are advised to begin acting like a large corporation well in advance of an IPO. Although many deals involving small businesses are sealed with an informal handshake, investors like to see a pattern of formal, professional contracts with customers, suppliers, and independent contractors. They also favor formal human resource programs, including hiring procedures, performance reviews, and benefit plans. It is also important for businesses to protect their unique products and ideas by applying for patents and trademarks as needed. All of these steps, when taken in advance, can help to smooth a business's passage to becoming a public entity.

The pace of IPOs reached a peak in 1999, when a record 509 companies went public, raising an unprecedented $66 billion. IPO fever was fueled by "dotcoms," or new Internet-based companies, which accounted for 290 of the initial public stock offerings that year. These fledgling companies went public to take advantage of a unique climate in the stock market, as giddy investors trying to catch the next Internet fad did not demand much in terms of profitability. New Internet-based companies with limited track records were able to use the public markets as a form of venture capital. In fact, new issues of stock in dotcoms jumped an average of 70 percent on their first day of trading in 1999. By the middle of 2000, however, drops in the tech-heavy National Association of Securities Dealers Automated Quotation (NASDAQ) made investors more cautious and dramatically changed the situation for Internet IPOs. Studies showed that 40 percent of high-tech IPOs were trading below their original offering price by that time. As a result, 52 companies decided to cancel or postpone their IPOs in the first six months of 2000. During the first 10 months of 2005, 147 IPOs took place, fewer than took place in 2004 (331) but almost twice as many as there had been in 2003 (75). Business owners must keep a close eye on market conditions and make sure their companies are well positioned and show a strong chance of long-term viability before engaging in an IPO.

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