Page 121 - Initial Public Offering - An Introduction to IPO on Wall Street

a big payout. However, an organization must satisfy the criteria laid down by the underwriters
before an IPO can even be contemplated. This includes the following:

 The business has an income that is predictable and stable. Public investors are not very
happy when an organization misses revenues or has trouble forecasting what it will be. The
organization needs to be experienced enough to be able to accurately forecast projected
revenues for the next quarter and next year.
 To finance the IPO process, there is additional cash. Going public is not inexpensive, and
many expenditures start to emerge well before the IPO. You can't necessarily use the money
collected by going public to pay for those expenses.
 Plenty of growth opportunities still exist in the business sector. The public does not want
to invest in a business with no potential for growth; it wants a business with today's secure
earnings, but also one with plenty of potential for future growth.
 The business should be one of the industry's major players. Before investors commit to the
investment opportunity, they will compare it with the other similar investments in the
industry.
 A competent management team should be in place.
 For public corporations, audited financials are a prerequisite.
 Robust business systems should be in place. Even if a business stays private, this can be
beneficial. However, going public makes it essential since it means that every aspect of
how the business is run will be scrutinized.
 The ratio of debt to equity needs to be lower. This ratio can be one of the biggest reasons
behind a successful IPO that gets derailed. With a heavily leveraged organization, it is
difficult to get a strong starting price for the stock, and the business may face issues with
stock sales.
 For the next 3 to 5 years, the organization has a long-term strategic strategy with financials
laid out to help the public see that the organization knows where it's headed.
 When considering investing in a business, beyond financials, investors look at the quality
of leadership to decide whether they should go ahead with the investment.

Bottom Line

Some underwriters require annual sales of ten million to twenty million USD with an income
of about $1 million. Additionally, management teams must display potential growth rates of
about 25 percent per year in a five to a seven-year timeframe.

Although there are exceptions to these conditions, there is no question about how much hard
work businesses must put in before they can enjoy the great payouts of an IPO or “going
public”.

5.2.6 Step 6: IPO Stabilization
The underwriter must provide professional advice, after-market stabilization, and establish a
market for the released stock after the issue has been introduced to the market.

There is a small opportunity period where the share price can be controlled by the underwriter.
There are no laws banning market manipulation during the 25-day 'quiet phase,' which takes
place right after the IPO.

In the event of order disparities, the underwriter performs after-market stabilization by buying
securities at or below the offering price. Stabilization operations can take place only for a brief
period.

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