Page 114 - Initial Public Offering - An Introduction to IPO on Wall Street

The following are the 7 steps involved in the IPO process that we will go through shortly:

1) Choosing an IPO Underwriter
2) Due Diligence
3) The IPO Roadshow
4) IPO Price
5) Going Public
6) IPO Stabilization
7) Transition to Market Competition

5.2.1 Step 1: Choose an IPO Underwriter
The IPO process begins with the selection of an investment bank for the issuing firm; the
investment bank has to be registered with the Securities and Exchange Commission (SEC) and
it is needed to guide the business on its IPO and to provide underwriting services. An
investment bank needs to be chosen based on the following criteria:

 Reputation
 Research Quality
 Relevant Expertise
 Reach of network distribution
 Previous relationship with the bank
 The relationship of the underwriter with companies they have worked with in the past

It can be a lengthy and costly process to underwrite an IPO. A lot of money and time goes into
the process and a team of experts is often needed to go through it successfully. However, a
good underwriter can make all the difference; it can be the difference between IPO failure and
a successful IPO.

The shortlisted banks already have relations with the business that wants to go public in most
cases. The business and its investors will approach these banks and ask them to provide their
proposal for the firm.

The firm chooses banks for underwriting and co-manager positions after receiving all the
proposals. The choice is often based on established partnerships. However, a lot of time it is
also based on the proposal itself. The IPO records of the banks and their credibility with
institutional investors play a significant role as well.

Most organizations pick three banks as underwriters and a couple more as co-managers, but in
"big" IPOs of well-known businesses, those numbers could be much greater.

The role of the underwriting team is to ensure that the successful completion of the IPO and
that the shares are sold at the right price. Usually, investment banks charge around 3 to 7 percent
of the overall purchase price of the IPO for underwriting and consulting services.

5.2.2. Step 2: Due Diligence
Underwriting is the mechanism by which an investment bank (the underwriter) serves as an
intermediary between the listed firm and the investing public; the bank serves as an

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