Page 151 - Initial Public Offering - An Introduction to IPO on Wall Street

banks to help organizations go public. The assistance offered by the banks to organizations is
discussed next.

8.2.1 Investment Banker’s Role in an IPO
Investment bankers bring to the table the largest offerings on Wall Street and other major stock
markets around the world. They are practically behind all stock market-moving financial
activities, including security offers, mergers and acquisitions, and IPOs.

Investment bankers work behind the scenes, which leaves the public less informed of their
activities. However, Understanding stock market practices starts with an understanding of the
roles of investment bankers. The following are the key roles investment bankers play in an IPO.

Underwriting

When a business employs an investment bank, the bank becomes the underwriter for the IPO
of the business. Underwriting involves assigning an aggregate value to a business entity and
purchasing shares at a discount to sell in the stock markets later on.

If the size of the IPO demands it, then it is not unusual for several investment banks to perform
underwriting for the same new issue, with one company acting as the chief underwriter.

Road Show

By understanding the demand for their stock in a roadshow, bankers help organizations go
public. They do this by physically meeting prospective investors in large metropolises to inform
them of the opportunity and to try and create interest in the IPO.

Lock-Up Period

Investment bankers start selling stock to public investors on the day of the IPO to make a profit
and raise the company's stock value. Bankers also introduce lock-up periods for new stocks
that normally last for six months. Early IPO investors cannot sell their shares during this time.
The entire purpose of this is to create demand for the stock.

Pricing

When initiating an IPO, pricing is one of the most sensitive activities. Investors are more likely
to reject the investment offer if the new stock is overpriced. On the flip side, a new stock that
is priced lower than its value can cause participants to lose out on an opportunity to profit.

Keeping this in mind, investment bankers can assist business executives in setting a suitable
price for a new issue. However, their recommendation is not always right. This makes it critical
to choose an investment banker who has a good understanding of your business and industry.
The most important considerations in selecting an investment bank for an IPO are discussed
next.

8.2.2 The Factors to Consider When Selecting an Investment Bank for an IPO
Based on the scale of their offers, their years in operation, and the nature of their activities,
prospective public corporations differ in many respects. Similarly, there are both large and
small investment banks; some of them are full-service while some specialize in specific
geographic locations or specific industries.

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