INITIAL PUBLIC OFFERING

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Initial Public Offering

Introduction

An initial public offering (IPO) is an opportunity for a private company to access funds offered by public investors. Through a company growth and expansion process, it will need to access more capital from the public and offer shares to prospective investors. One particular benefit of IPO is that it opens opportunities to access unlimited public funds in exchange for equity for the company. As a result, public investors become entitled to share the profit generated by the company during different dealings. IPOs are usually highly publicised to attract sufficient ‘hype’ from the media and communicate the company's value to the public. Before any IPO plans are implemented, private company management needs to set an initial price of the shares that new investors during and after the IPO will be expected to pay per share. IPO prices are determined based on factors such as the market price of a share of similar companies, demand for allocation, and, most importantly, the company's growth prospects. If the company has higher growth expectations and indications that it will grow faster, it assures investors more returns, hence higher initial share prices during the IPO launch.

Literature on whether IPOs have historically been suitable for investors

Historically, IPOs have proven to be a good investment for many investors. According to Gao, Liu, and Chan (2017), an IPO in an old tradition marks the transition of a company from private to publicly traded. This process, on average, led to growth or investors' money. Launching an IPO envisions one key objective, to ensure the company's growth, retain more profitability, and gain a competitive advantage due to a positive public image. Additionally, the history of IPO presented by Huang, Li, and Chen (2019) proves that IPO is a viable investment opportunity that leads many investors to double or triple their investment in shorter periods company to other conventional investment opportunities. The opportunity to invest and get a return is founded on many principles, which are the heart of any private company aspiring to ‘go public.’

First, IPOs aim to collect more funding to undertake company-level investments that benefit shareholders. According to Jog, Otchere, and Sun (2019), IPOs are issues to companies that have operated and met a set policy and legal criteria before entering the public fund market. These prerequisites ensure that a company is competent in what it does, has good management, and I willing to commit to delivering what it promises to its investors. Given the opportunity to access more funding from the general public, companies can invest in their core business and values, propelling growth faster than when they had limited access from private shareholders (Zou et al., 2020).

Secondly, an IPO opens companies to public notice and the goodwill that comes with it. Jandik, Jandik, and Xu (2020) noted that IPO’s Launching day invites delegates, the general public, and business representatives to share the dream of the business. This function is characterised by media which helps spread the word about a company’s new milestone. The process assures the business of many new prospective customers based on the public relations image depicted during the initial public offering. When a business engages the public in its investment dreams, the public will feel part of the company’s strategic agenda and develop loyalty with goodwill to support it in its investment plans.

IPO’s history can be witnessed by many businesses that have performed exceptionally after inviting the general public to invest in the dream of their business model. An excellent example is the Aveva Group PLC, which started in 1967 and went public after almost 30 years of operation. In 1996, the Aveva Group PLC...