Reading: The Going Public Process

There are three basic ways how firms can go public, depending on who is in charge of listing the shares and whether the firm raises new equity in the process: 
 

• Initial public offering (IPO).
• Direct listing
• Direct public offering (DPO)

In this section, we take a close look at Initial Public Offerings (IPOs), which constitute the "standard" way of firms to go public using an underwriting syndicate. The section "Alternative Listing Strategies" then discusses the two other forms of public offering and how they differ from an IPO.

As we have just mentioned, the Initial Public Offering (IPO) is the traditional way for firms to go public and list their shares for the first time on a stock exchange. An IPO generally pursues two main goals:

• Raise new capital for the issuing firm
• Provide a liquid market for the subsequent trading of the firm's shares. 

The basic structure of an IPO is fairly simple: The issuing firm commissions a consortium of investment banks, the so-called underwriting syndicate, to place its shares with the investing public, list the shares on a stock exchange, and make sure that the shares are well received by market participants after they start trading on the stock exchange.

A prominent case in point is Dropbox's IPO on the NASDAQ on March 22, 2018. The U.S. file hosting company that operates out of San Francisco, California, commissioned a large consortium of investment banks, including Goldman Sachs, JP Morgan Chase, Deutsche Bank, Allen & Company, and Bank of America Merrill Lynch, among others, to sell up to 41.4 million shares of common stock Class A to the investing public.

Let us use the Dropbox IPO to take a closer look at this fascinating way of converting a private company into a public company. The following graph summarizes the standard logic behind an IPO. 

In what follows, we discuss this logic step by step. In particular, we look at the key functions and responsibilities the underwriters assume in the going public process:

• We start with a (rather technical) overview of the key due diligence steps and regulatory filings it takes for a firm to go public. While we focus on the U.S., the basic process is similar for most major stock exchanges.
• Then we turn to the marketing of the securities, and its main purpose of building a solid order book for the issue (book-building).
• The next major challenge is the pricing of the securities for the IPO investors.
• We discuss reasons why many IPOs are significantly underpriced
• We bring everything together and and summarize the actual offering of Dropbox.
• We discuss an alternative pricing and allocation mechanism for IPOs: Dutch Auctions.