What is an IPO: Initial Public Offering Explained

An initial public offering (IPO) is the way a private company becomes publicly traded by offering its shares to the public. The model has been around since 1600s. How does an IPO work? 

Necessary funds are critical for a company to survive and thrive. Therefore, every company’s journey involves backers and investors, which are often drawn by an IPO. What is an IPO or initial public offering?  

An IPO is a massive step in a company's journey—it is the first time the shares are offered to the public, allowing ordinary investors to participate in the company's potential success. This critical event can cause the market to be very excited, just like the noise that was made for Reddit's recent IPO, where the social media giant became one of the world's most watched public companies. This article discusses what an IPO is, how it works, and the top 10 IPOs of all time.  

Understanding Initial Public Offerings

IPO is the way a private company that is not listed publicly becomes publicly traded by offering its shares to the public. 

Imagine this: you and four of your friends start a tractor-manufacturing business with a starting capital of $50,000. With the business going on well, you decide to enlarge it. However, you require more money than your small group can provide. You decide to raise funds from many public investors by going public through an IPO investment.  

Here's what IPO would mean for your business:

• It helps your business to get the necessary funds from the public market.
• It changes your company's status from private to public, thus spreading its financial base and potentially increasing its credibility.  

How Does an IPO Work?

A company usually goes for an IPO when it already has a solid financial record or strong market position, profitability, growth potential, and more. Companies with good potential may go for the IPO at different valuations depending on their financial health and market potential.  

Source: Freepik

The procedure starts with the company choosing underwriters–usually investment banks–to assist in the transition, including determining the company value and share price, complying with the regulations, etc. The relevant authority (e.g., the U.S. Securities and Exchange Commission) has to review and check the company's IPO proposal, ensuring all the financial disclosures are correct and that the company satisfies all the regulatory requirements.  

Once the company gets the approval, it can sell its shares on the stock market, which will be available to both institutional and retail investors. This stage is critical since it shows how many shares will be and at what price, showcasing the public’s interest in the company. A successful IPO launch can boost the company's capital and credibility and help the firm grow and expand further. 

IPOs allow companies to attract more investors and allow investors to participate in a company before it launches in the market.  

Top 10 IPOs of All Time

Since their existence, global markets have expanded, and companies have been using IPOs to raise capital. 

Did you know? The first IPO was issued by the Dutch East India, also known as Vereenigde Oost-Indische Compagnie, and it started the modern financial phenomenon of initial public offerings. Below is a closer look at the top 10 IPOs that have made a lasting impact globally. 

1. Saudi Aramco: The Saudi Aramco, also known as the Saudi Arabian Oil Company, first went public on the Saudi Stock Exchange in December 2019 and raised about $29 billion. A public issue of this size was a turning point for the international finance community, as this was the biggest IPO of the time.

    

2. Alibaba: Alibaba used to be the largest IPO before Saudi Aramco. In September 2014, it became a public company on the New York Stock Exchange, and it raised $25 billion, becoming a major player in the e-commerce industry and setting a high bar for other companies that want to go public in the future.  

    

3. SoftBank: SoftBank, a telecommunications giant, managed to collect more than $21 billion through its IPO in December 2018 and was listed on the Tokyo Stock Exchange. This crucial fresh primary was the major cause of the company's technology investments in many parts of the world. 
   
    
4.  NMCN, formerly known as NTT Docomo: In October 1998, the NNT Mobile Communication Network was listed on the Tokyo Stock Exchange with a capital of $18 billion. This public offering was a turning point for the company, allowing it to expand its cellular services throughout Japan.
   
    
5.  Visa: During the Global Financial Crisis in March 2008, Visa was listed on the NYSE and received over $17 billion. This smart decision is why Visa is now a top company in the financial services industry. 
   
    
6. AIA: The AIA Group, a financial services company from Hong Kong, which is the world's largest initial public offering of the year and raised about $18 billion in its IPO on the Hong Kong Stock Exchange. The key to the fast-rising of its growth in Asia was funding.
    
    
7. Enel SpA: In 1999, the Italian power company Enel SpA earned over $16 billion from its IPO on the Borsa Italiana. The money was crucial for renewing its infrastructure and extending its renewable energy projects.
     
    
8.  Meta:  Meta was just Facebook, which initially got $16 billion in its IPO on Nasdaq in 2012. What was raised was the majoron that the company got and did the social media technologies.
     
    
9.  General Motors: General Motors returned to the market with a massive bang in 2010 after the reorganisation under bankruptcy protection; it raised $16 billion in its IPO on the NYSE. This allowed GM to rise from the and produce new products. 
   
    
10.  ICBC: In 2006, the Industrial and Commercial Bank of China raised $14 billion in a dual listing on the Hong Kong Stock Exchange and the Shanghai Stock Exchange. This IPO was the moment when ICBC became a world-class bank. 

These IPOs changed the companies and their industries and greatly affected the global financial markets, thus showing the mechanism of public investment and corporate growth. 

Source: Freepik
 

IPOs are the turning point for companies to raise the funds they need and for investors to participate in the company's growth, but the process is complete with both big advantages and big challenges. To navigate these waters, one must be familiar with both sides to maximise the opportunities or minimise the risks.  

The Pros and Cons

A March 2024 EY report clearly shows the global IPO market's present condition. George Chan, EY Global IPO Leader, said:  

"In 2024, the IPO market participants are going to face a new world that is completely different because of the new investor preferences that are now in favour of the proven profitability in the midst of the changing interest rates, the complex geopolitical dynamics, and the rising influence of AI,"  

This summary indicates the most important trends and shows potential interest from investors and companies. 

• Market Worldwide: The worldwide IPO issuance was reduced by 7% in the first quarter of 2024, which is a sign of investor caution.
  
   
• Capital Raised: Even though there were fewer IPOs, the market still managed to raise 287 deals in total. 7 billion was reported by the first quarter.
  
   
• Sector Highlights: The sectors with the most IPOs were the industrial, consumer, and technology sectors.
  
   
• Regional Trends: Japan features IPOs because of its stock market performance, which is also a trend in Europe and the Middle East. On the other hand, the US, ASEA, and India have had stable trends. 
  
   
• Future Outlook: The forecast states that the AI sector will see many initial public offerings. This means that the tech industry will be the main driver of IPOs.

Bottom Line

An IPO is a big event for a company and a perfect opportunity for investors who are ready to invest in its future. However, it is essential to mix excitement with careful analysis and understand that every investment has its risks. 

You’re advised to thoroughly investigate the company's basics, market position, and buy an IPO that suits your financial goals, investment strategy, and risk tolerance.