Corporations Law Initial Public Offerings Ipos Are Essay

Excerpt from Essay :

Corporations Law

Initial Public Offerings (IPOs) are the first time a privately held company sells its stock to the public. When such corporation needs to raise additional capital, it can either take on debt or sell partial ownership. If the corporation chooses to sell ownership to the public, it engages in an IPO

(Initial Public Offerings, 2011, p. 1). Although it is difficult to get on the ground floor of an IPO for small private investors there are still ways that these individual investors can make money on the IPO market because full-service and online brokerages are increasingly offering IPO shares to their customers reducing their financial risk of investing (Initial Public Offerings, 2011, p. 1).

Despite this apparent benefit, there are also many drawbacks linked to an IPO. A large drawback to going public is that the current owners of the privately held corporation losses a part of their ownership. Corporations [will therefore have to] weigh the costs and benefits of an IPO [very] carefully before performing an IPO (Initial Public Offerings, 2011, p. 1). Fortunately for BMG, it faces potential investors on Baderman Island that are financially very strong, such as the wealthy Baderman family, Baderman Main Hotel, the Tenney and Melanchon Convention Center and Hotel. Also the very attractive cultural and touristic attractions of Baderman Island - in the hope increased tourist income flows - are very likely to be potential and financially highly profiled investors. More successful business activities resulting from BMG's stay of his main office and center of operations will certainly be an essential factor attracting potential investors as it is almost a guarantee factor that their investments will not fail. For Baderman Island and the Chamber of Commerce increased income and corporation taxes will be strong incentives to support public IPO by BGM.

Because BMG seems to have done financially very well since its founding in 2004 and has the strong support of the Chamber of Commerce and the wealthy Baderman family, BMG has substantial ground for an assumption that losing ownership of some stock through an IPO will not lead to a restriction of its management decisions or financial risks caused by an abstention from investments. BMG can reasonably rely that potential Baderman Island investors will not interfere with BMG business strategies because both BMG and potential investors, have essentially the same interest: Making high (er) higher financial profits. Whether the aftermarket performance of an IPO works well might nevertheless be risky especially for the small individual investor. The aftermarket performance of an IPO is how the stock price behaves after the day of its offering on the secondary market (such as the NYSE or the Nasdaq). Investors can use this information to judge the likelihood that an IPO in a specific industry or from a specific lead underwriter will perform well in the days (or months) following its offering. Unfortunately, for the small individual investor, realizing those much-publicized gains is nearly impossible. Even if there are today full-service and online brokerages offering IPO shares for their customers, unfortunately, these shares tend to be reserved for clients with the largest balances (usually $100,000 and up), and are thus out of the reach of many investors. Furthermore, most brokerages will not allow investors to sell IPO shares within a certain time period (generally 60-90 days), which prevents any short-term gains (Initial Public Offerings, 2011, p. 2).

The opportunities of an IPO are that capital raised through an IPO does not have to be repaid, whereas debt securities such as bonds must be repaid with interest (Initial Public Offerings, 2011, p. 1). The threats of an IPO for a privately held corporation in general are t hat if it chooses an IPO just as to get out of financial problems, an IPO will not likely be a wise management decision and is indicative of poor management. On the other hand, if the company seems to have some smart plans for the money -- which BMG certainly has, then an IPO might be a good decision.

Both BMG and potential investors will have to undergo substantial research on the business risks involved and examine the business model of BMG and its management team. Researching financial risk involves examining the corporation's financial statements, capital structure, and other financial data (see Initial Public Offerings, 2011, p. 2).

Another threat might be the need for BMG in accordance with the Securities Act of 1933, to file a registration statement with the Securities and Exchange Commission (SEC). The registration statement must fully disclose all material information to the SEC, including a description of the corporation, detailed financial statements, biographical information on insiders, and the number of shares owned by each insider. Another disadvantage is the length of the procedure. After filing, the corporation must wait for the SEC to investigate the registration statement and approve of the full disclosure. Only after the SEC approves of the corporation's full disclosure, the corporation and the underwriter decide on the price and date of the IPO; the IPO is then conducted on the determined date. IPOs are sometimes postponed or even withdrawn in poor market conditions (Initial Public Offerings, 2011, p. 1).

II. Acquiring another organization in the same business: If BMG decided to expand by means of acquiring another privately held company in the same industry it would have to be qualified as a so called "Synergistic Buyer." The synergistic buyers are U.S. companies and Asian companies who are already established within an industry. They are usually a dominant player within their geographic region or on a national basis and seek rapid growth through acquisition. These buyers will be operating as public corporations, private corporations or an established partnership. Therefore, this type of business transaction would allow BMG becoming a public corporation without losing any property assets. Often the target company is merged in with the acquiring company either immediately or over a period of time.

T he synergistic buyer's primarily goal is to acquire a company or a group of companies within the same industry to gain economies of scale and business growth not otherwise available. Also from this point-of-view it seems to be a good decision for BMG because knowledge about the organizational and financial structures of the target corporations reduces the financial for BMG substantially and almost guarantees to gain financial expansion. These buyers are seeking long-term growth rather than rapid growth and quick cash out sought by the financial buyers. The theoretically correct approach to use in valuing any assets including companies is the so called Discounted Cash Flow methodology.

However, the application of the DCF methodology itself raises certain unsettled issues, including whether the same discount rate should be used for valuing private companies as when valuing comparable public companies. Another threat is that the reliability of DCF methodology depends on the accuracy of cash flow projections and the use of appropriate risk measures (Koeplin & Sarin & Shapiro, 2000, p. 94).

The synergistic buyer's seed capital usually comes from their own equity funds and BMG -- through its remarkable business success in economic operations is very likely to have more than enough equity to buy another company in the same economic field. Long-term financing is usually arranged through banks and mortgage companies. Sometimes mezzanine financing is needed to bridge the gap between the sales price and the long-term financing. Sometimes, the principal in the target firm is given stock in the acquiring company as part of the selling price and hired to continue managing the acquired firm or a division of the acquiring company that includes the acquired firm (Who are the buyers for privately held companies ? ibid). Another advantage for BMG would be that target companies are especially attractive in industries where economies of scale are possible whereby the acquiring company can obtain significant post-deal expense savings, such as elimination of dual facilities, support staff, or other overhead expenses (Who are the buyers for privately held companies? 2008, p. 3).

III. Merging with another Organization: A merger always involves a transfer of the assets and business of one or more corporations to another corporation in exchange for its securities, cash or other consideration. A merger results in a transfer of the assets to one of the constituent corporations that absorb the other (Cox and Hazen, Corporations, 2003, p. 592).

Advantages and disadvantages of mergers and acquisitions (M&A) are determined by the short-term and long-term company strategic outlook of the new and acquiring companies. This is due to a host of factors including market conditions, differences in business culture, acquisition costs and changes the financial strength surrounding the corporate takeover (Berry, 2009, p. 1). Advantages of M&A can include increased market share, lower cost of production, higher competitiveness, acquired research and development know how and patents (Berry, 2009, p. 2).

Not all the above advantages of mergers and acquisitions may be realized, but are often included among the reasons for engaging in the corporate activity. When BMG is able to benefit from all these…

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