Many companies go public so that they can expand and so that they can offer employees additional benefits. In addition Shepherd, et al. 2001 asserts that An initial public offering appears to offer the entrepreneurial company a number of benefits, including legitimacy with stakeholders, access to debt capital (Sutton & Benedetto, 1988), and a mechanism by which entrepreneurs can reacquire control from investors (Black & Gilson, 1998). For investors, an IPO represents an exit mechanism (Sutton & Benedetto, 1988). Sahlman (1990) documents that almost all of the returns on venture capital funds are earned on companies that go public. Bygrave and Timmons (1991, p. 159) note that "hot IPO markets are by far the most important cause of peaks in venture capital returns (Shepherd, et al. 2001)."
As it relates to IPO and the current market environment the main incentive is still raising funds to expand the company and solidify the standing of the company. The aother incentives may be dependent upon the industry that the company is a member of. For instance, many tech stocks are volatile and unless it is a well-known company such as Google, the market may not be receptive to the company and investors may choose a stock that is less risky.
How will the markets react in a new wave of IPOs given past experience?
The way that the market reacts to IPO's is highly dependent upon the industry that the company is a member of.
The reaction of the market has a great deal to do with current events; these can be national events and/or international events. For instance, at the present time the market may be more reactive to an IPO of an energy company than that of a retail store. Such a reaction would occur because of the global demand for energy. The fact that this demand is expected to increase, also generates more of a reaction in the market.
Will these IPOs have any effect on their competitors stock traded in the secondary markets?
Again it depends on the industry and the size and success of the company with the IPO. Some industries are so saturated that an IPO offered by a new company that is not well-known may not have any effect at all. However, if there are not many companies in the industry and the IPO is coming from a company that is well-known and has sure financial footing, competitors may be effected.
Given the highly cyclical nature of IPOs, do you think that we are entering a new "hot issue" period?
It seems that there is some evidence to suggest that we are entering a hot issue period. However, this hot issue period isn't just confined to the United States, it is a global phenomenon. According to an article published by Ernest and Young IPO activity is in congruence with the changing landscape of the world economy (The IPO Market). In addition, an important trend during 2005 was an increase in IPOs in countries such as Israel, China, Poland and Russia (The IPO Market). In addition it is expected that during 2006 there will be increased interest in markets including South Korea, India and Brazil (The IPO Market).
The purpose of this discussion was to describe the process of going public, the incentive associated with an initial public offering, the reaction to new IPO's and new trend in IPO's. We found that the IPO process is substantial and costly. The research indicates that the SEC governs the manner in which IPO's take place. Although it is an arduous tasks there are also some substantial financial incentives that can only be realized through a public offering. The research also suggests that the reaction to an IPO is highly dependent upon the industry and the volatility of the market which is often determined by world events. In addition, it appears that IPO's will continue for the next few years.
Evans, L., & Strenski, J.B. (1996). EDGAR and IPOs: The Challenge of Going Public. Public Relations Quarterly, 41(4), 38+.
Gutterman, A.S. (1994). The Legal Considerations in Business Financing: A Guide for Corporate Management. Westport, CT: Quorum Books.
Jagannathan S., Venkatesam, R. Oct 26, 2001A Roadmap for an Entrepreneur, Stage 4: Going Public. http://www.phptr.com/articles/article.asp?p=23771&rl=1