Page 191 - Initial Public Offering - An Introduction to IPO on Wall Street

While over these 8 years, the offering sizes do not substantially change, a key observation
that needs to be mentioned is that the average float decreases dramatically during this period.
What does that imply? In this case, Float is the percentage of the business sold at the IPO
price.

There are a few factors at play: businesses take a cautious approach to pricing, thereby selling
less stock at IPO. To safeguard their shareholdings, management and boards often want less
dilution. Less float involves implies taking less cash to the balance sheet which is not ideal
for some businesses. Nevertheless, IPOs are a great way for modern businesses looking to
expand or grow to raise much-needed capital.

13.1 How Modern IPOs Work

The procedure a business must undergo to list on the stock exchange is always lengthy and
costly. Until investors even hear about the potential to invest, a lot needs to happen behind
the scenes. A broker, an account, an auditor, and often a lawyer or legal team, and so on must
be appointed by the business.

The organization must compile a collection of audited accounts, file and send applications to
the regulator and industry, and generally carry out a massive amount of cleaning up before
even the slightest suggestion of a possible investment opportunity is presented to investors.
All the behind-the-scenes work that needs to take place is already covered in this book. Here,
we look at the process from the time the investors get involved.

13.1.1 It Starts with a Rumor
Considering that the IPO process can take a significant amount of time, often several years
and that a business must hire a large number of consultants/service providers to facilitate the
process, investors often catch wind of a future IPO well before it is formally announced.

A business employing a new accounting group as its auditor or recruiting a company like
Goldman Sachs as a consultant may cause rumors. By themselves, these acts do not
necessarily imply that a business plans to float, but they all add fuel to the fire of the rumor-
mill.

13.1.2 Intention to Float
If a business is going to float, it will officially declare its decision to float via an intention to
float (ITF). This can occur anytime between a few days and a few weeks before its planned
listing date.

An ITF provides a short description of the business, the amount it aims to generate, and a
rough time scale detailing when the bid is likely to launch when it will close when the
issuance will occur, and when the stock will be listed on the market.

13.1.3 Investing During the Offer Period
This is the time during which investors get the opportunity to examine the business's more
comprehensive details and eventually determine whether they want to invest and how much
they want to invest. No individual investor is aware how much other investors are prepared to

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