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Initial Public Offerings Paper

916 words - 4 pages

Initial Public Offerings Paper
Michael Walls, James Denton, Katie Rink, Lisa Johnson
July 28, 2014
Deneisha Johnson

Initial Public Offerings Paper
Many giant corporations seek the opportunity to make their companies grow, such as merging or acquisitions from another company.  There is one thing a company can do in order to grow their company that is to make an Initial Public Offering. Companies like Facebook, Apple, or Microsoft at one point in the beginning have stepped into the stock market by their IPO's.  These steps are what it takes to raise capital and what roles help the company begin an IPO.
An investment banker is a person who is employed by a financial institution ...view middle of the document...

A syndicate is a financial service body developed to handle a hefty transaction which would be difficult or inconceivable for the people or business’ to handle alone. Syndication enables companies to gather their finances and share the risks affiliated with the transaction (Investopedia, 2014).
Pricing the issues of new securities are a very delicate matter for the underwriters and the investment bankers. Pricing the issue to high causes investors to shy away and decreases the amount of capital that can raise for the firm. Pricing the issue to low will bring about potential losses if income for the firm that will be beneficial for future projects. If the initial offering is too high, the underwriters may be forced to hold the issues in inventory, tying up additional funds thus inducing other financing options that will require interest to be on borrowed funds. The consensus is to price issues on the lower end of the scale. While it does diminish the amount of funds that can be , it ensures that all of the initial subscriptions are sold to investors, that will likely return for future investments.
Some of the risks involved in public offerings are withdrawing probability and underpricing. According to Journal of Corporate Finance, there have been increases in insurance policies such as D&O/E&O, errors and omissions/directors and officers (Hao, 2011). Through the use of these types of insurance policies, it is possible to save valuable money lost through underpricing. One of the ways the securities laws have decreased the risks involved in an IPO is the Private Securities Litigation Reform Act of 1995 (PSLRA), which “increased the hurdles to successful private litigation for securities fraud, thus reducing expected litigation costs faced by issuers and underwriters” (Hao, 2011). By reducing the litigation costs for underwriters, it in turn reduces the underpricing, in turn reducing the withdraw probability.
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