A:

While some large and successful companies are still privately-owned, many companies aspire toward becoming a publicly-owned company with the intent to gain another source of raising funds for operations. An initial public offering (IPO) represents a private company's first offering of its equity to public investors. This process is generally considered to be very intensive with many regulatory hurdles to jump over. While the formal process to produce the IPO is well documented and as a result is a fairly well-structured process, the transformational process of which a company changes from a private to a public firm is a much more difficult process.

A company goes through a three-part IPO transformation process: a pre-IPO transformation phase, an IPO transaction phase and a post-IPO transaction phase.

The pre-IPO transformation phase can be considered to be a restructuring phase where a company starts the groundwork toward becoming a publicly-traded company. For example, since the main focus of public companies is to maximize shareholder value, the company should acquire management that has experience in doing so. Furthermore, companies should re-examine their organizational processes and policies and make necessary changes to enhance the company's corporate governance and transparency. Most importantly, the company needs to develop an effective growth and business strategy that can persuade potential investors the company is profitable and can become even more profitable. On average, this phase usually takes around two years to complete.

The IPO transaction phase usually takes place right before the shares are sold and involves achieving goals that would enhance the optimal initial valuation of the firm. The key issue with this step is to maximize investor confidence and credibility to ensure that the issue will be successful. For example, companies can choose to have reputable accounting and law firms handle the formal paperwork associated with the filing. The intent of these actions is to prove to potential investors that the company is willing to spend a little extra in order to have the IPO handled promptly and correctly.

The post-IPO transaction phase involves the execution of the promises and business strategies the company committed to in the preceding stages. The companies should not strive to meet expectations, but rather, beat their expectations. Companies that frequently beat earnings estimates or guidance are usually financially rewarded for their efforts. This phase is typically a very long phase, because this is the point in time where companies have to go and prove to the market that they are a strong performer that will last.

To learn more about IPOs, see IPO Basics Tutorial, How does an IPO get valued? and The Murky Waters Of The IPO Market.

RELATED FAQS
  1. How can average investors get involved in an IPO?

    An initial public offering, or IPO, is the first sale of stock by a new company, usually a private company trying to go public. ... Read Answer >>
  2. What are the advantages and disadvantages for a company going public?

    An initial public offering (IPO) is the first sale of stock by a company. Small companies looking to further the growth of ... Read Answer >>
  3. Are IPOs available to short sell immediately upon trading, or is there a time limit ...

    The quick answer to this question is that an IPO can be shorted upon initial trading, but it is not an easy thing to do at ... Read Answer >>
  4. What does 'going public' mean?

    Going public refers to a private company's initial public offering (IPO), thus becoming a publicly traded and owned entity. ... Read Answer >>
  5. Can mutual funds invest in IPOs?

    Learn whether mutual funds can invest in IPOs. IPO investing is appealing because there is a big upside, but there is considerable ... Read Answer >>
  6. Who can get access to a highly anticipated IPO?

    Purchasing a highly anticipated initial public offering may seem like a sound investment strategy, but most individual investors ... Read Answer >>
Related Articles
  1. Investing

    Initial Public Offering (IPO) Explained

    An initial public offering (IPO) marks the start of a company's publicly traded life. Find out why companies undergo IPOs, and how the process works.
  2. Markets

    Why Are Companies Taking Longer To Go Public?

    Learn why private companies are waiting longer to have their IPOs. Understand why it may be more advantageous for a company to stay private.
  3. Fundamental Analysis

    Top Reasons IPO Valuations Miss The Mark (MS, ZNGA)

    The costly services of investment banks don’t necessarily guarantee accuracy in IPO pricing.
  4. Investing Basics

    How An IPO Is Valued

    The process of determining a company’s initial share price includes quantitative and qualitative components.
  5. Retirement

    IPO Basics: Conclusion

    Let's review the basics of an IPO: An initial public offering (IPO) is the first sale of stock by a company to the public. Broadly speaking, companies are either private or public. Going public ...
  6. Investing

    How To Track Upcoming IPOs

    Interested in investing through IPOs? Here is the list of free sources for information on upcoming IPOs.
  7. Investing News

    6 IPO Market Trends to Watch in 2016

    Find out more about the outlook for the initial public offering (IPO) market in 2016. Is it expected to improve or will it be more of the same?
  8. Retirement

    IPO Basics: What Is An IPO?

    Selling Stock An initial public offering, or IPO, is the first sale of stock by a company to the public. A company can raise money by issuing either debt or equity. If the company has never ...
  9. Expenses

    While an IPO brings a lot of cash in the door, there are plenty of costs before you reach the IPO. Some can be paid by IPO proceeds, but you should seriously consider if your company can bear ...
  10. Personal Finance

    The Ups And Downs Of Initial Public Offerings

    Initial public offerings aren't the best option for every company. Consider these factors before "going public."
RELATED TERMS
  1. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs ...
  2. IPO ETF

    An exchange-traded fund that focuses on stocks that have recently ...
  3. Going Public

    The process of selling shares that were formerly privately held ...
  4. Repackaging

    When a private equity firm takes a public firm private by purchasing ...
  5. Forced Initial Public Offering - IPO

    An instance in which a company is forced into issuing shares ...
  6. Laddering

    The promotion of inflated pre-IPO prices for the sake of obtaining ...

You May Also Like

Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center