THE GOALS OF INVESTMNET BANKS UNDER IPO PROCESS Harvard Case Solution & Analysis

1: Introduction:

            The thesis is about the goal of the banks as a participant in the IPO process. The banks participate in an IPO through many ways to facilitate the company offerings through best effort and underwriting.

1.1: Background information:

            An initial public offering is to sell any security to the general public for the first time in the history of the company that is offering an IPO. The reason to offer IPO is to raise liquid cash to facilitate any activity in the company. The IPO can be made for equity instrument as well as a debt instrument (Ritter, n.d.).

            In case of equity instrument a private company offers its shares to the general public to make the company public limited from private limited. The reputed private companies offer IPO because small private company IPO cannot get successful due to its size and market reputation. If a company gets an opportunity for expansion, then it goes towards public to offer IPO and raise liquidity for it.

            The debt securities are also offered by private companies as well as public company that has a good market reputation. The reputed companies can raise cash through debt offerings because nobody is willing to invest in those companies on which person does not hold confidently.

            The company needs an agent that facilitates the IPO and the best agent is investment banks. The investment banks play a role of an agent in case of a public offering. In case of IPO banks provide two types of services; best effort agreement underwritten agreement or a firm commitment (Ritter, n.d.).

            In its best effort, underwritten agreement the bank will perform its best role to sell the entire securities at a specific price to earn an amount of fees from the client on sold securities. It is considered to be the most risky way of offering IPOs. The reason is that the bank will do extensive advertisement, campaigning and many more efforts to successfully sell all the securities made under the contract (Allison, 2008).

            In its best effort, the bank does not guarantee sale of securities and it does not buy any of the securities. The bank tries its best to sell all the securities to earn a commission income on selling securities. The risk is than any unsold securities are returned back to the company and banks are not under any obligation for those unsold securities. The time period is specified under the contractual arrangement between the bank and the company to IPO as after that time periods bank will not offer IPO to the general public (Allison, 2008).

            Under the firm commitment underwriting an investment bank to purchase all the shares of the company at a price under contractual arrangement and then it sells those shares to the general public. Any unsold shares stay with the investment bank as now it holds those shares under the contractual arrangement. The banks earn the difference between the purchase price from the company and the selling price to the general public (Katrina Ellis, 1999).

            This contractual arrangement is better for the company, but it is risky for the banks, therefore the difference between the sell price and purchase price is high as compared to best effort because of higher risk is with the bank in this offering (Katrina Ellis, 1999).

1.2: Problem statement:

            The problem statement is to access the goals of the banks to participate in the IPO process and its goals to involve itself in such offering. The motive in such offerings and the resulted implications on the parties were involved under IPO process. In addition, the IPO process and contractual arrangement between the parties and types of IPO and obligations of banks of those contractual arrangements were also involved under IPO arrangements. Further involvements were of role of parties in its individual estate and best performance of those parties; the performance of banks to make IPO successful for the company and for itself and net earnings of bank from such agency arrangement.

the Goals of investmnet banks under iPO process Case Solution

1.3: Research objectives:

            The research objectives of the thesis are given below.

  • The first objective is to understand the IPO and the reasons behind the offering IPOs.
  • The types of IPO and what are the possible outcomes of such different types of IPOs.
  • The benefits of IPOs to the offering companies and requirements that are required to be fulfilled by the companies to offer IPOs.

The involvement of the banks in this process and the reasons behinds the involvement of the bank.............

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