There are a few reasons why a company may issue an initial public offering (IPO), but primarily a company will do it to provide itself with capital expansion without incurring debt. An IPO enables a company to gain access to a pool of stock market investors through listing its shares on the public stock, thus increasing its chances of raising revenue to drive future growth.
The investors are happy because they have a right to future profits distributed by the company and the right to a capital distribution in case of a dissolution. The company is happy because it gets the chance to increase income without being required to repay the capital outlays.
Traditionally, the issuing of an IPO has been reserved for well established firms with a loyal client or customer base that is considered a safe bet on the stock market. British Gas PLC's $7.6 billion IPO and Japan's Nippon Telegraph & Telephone's $13.7 billion are cases in point.
Once listed these large, well established companies benefit from the capital drawn from the general market, without having to seek and negotiate with individual investors. This helps to drive growth through attracting higher profile C-Level executives and management to the company and can expedite the development of mergers and acquisitions.
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Japanese asset price bubble
Throughout the late 1980s and early 90s Japanese firms were highly active in the IPO market as technology and communications companies took advantage of the growing demand for high-tech ways to communicate during the Japanese asset price bubble.
However as we neared the end of the 1990s internet start-ups and other companies leading the way in world wide web innovations, began to really capture the attention of investors as the dot-com bubble transformed IPOs.
This period (between around 1995 and 2003) witnessed the domination of US IPOs. A cluster of activity involving smaller deals - still in their billions but small compared to the likes of Nippon ten years earlier - was indicative of a change in business focus.
These companies were attracted by the possibility of cheap access to capital and increased exposure and prestige. Making money appeared to come easily to many during this time and investors were willing to throw money at anything that caught their eye, stock markets in industrialized nations saw their equity value rise rapidly from growth in the more recent Internet sector and related fields. They never had it so good.
However, as is so often the case when things are going so well people seemed to forget that for every boom there's a bust.
Where next for IPOs?
The market downturn at the start of the new century culminated in the global financial meltdown - the worst in about 60 years - at the end of 2007. During this tough time for global markets, IPOs have largely taken a back seat but when they have been issued that have return to the more traditional form of large, well established firms offering big sums.
But where next for IPOs?
For the time being, as investors remain more cautious over where their money is spent and start-ups and young firms remain a massive risk in the eyes of backers, IPOs will keep to the old school trend of trend of big firms looking for a quick buck.
Geographically, it's hard to look beyond China's current domination of the IPO market continuing for some time as its economy burns brighter and brighter.
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