Raising Capital as a Publicly-held Company
In an Initial Public Offering, the underwriters syndicate want their customers to purchase the IPO shares as cheaply as possible. When the trading starts, after the closing of the IPO, and the share price increases, the underwriters customers get the benefit, not the company going public. This means that the owners of the company received less than their company was worth, as evidenced by the price the public was willing to pay for the shares.
Example: XYZ is valued by the underwriters at 20 times earnings, for a total of $20 million. The IPO will be for 2 million shares at $5, totaling $10 million, for half of the company. Immediately following the IPO, the price increases to $6.25 per share, which reflects a market value of 25 times earnings. The owners of XYZ should have received an additional $2,500,000 for their shares.
In a reverse merger with a reporting listed public shell company, the shares of the newly merged company begin trading immediately following the announcement of the merger. The price per share is determined by public trading, not an underwriting syndicate.
Once public, the newly combined company can register shares with the Securities and Exchange Commission, followed by an offering of the shares to the public. The shares sold to the public would be priced at the same price as the shares traded on the public market. The company receives full value for its shares. Commissions are substantially less than the 10% commission and 5% expenses paid to underwriters in an IPO. A public offering registration takes about 90 days with current audits.
Public companies can do as many public offerings as they like. Multiple small public offerings can be a excellent strategy for a fast growing company. Take XYZ as a example, with its net income of $1,000,000, and market value of $25 million. If XYZ sold 50% of its stock it would bring in $12.5 million. The alternative strategy would be for XYZ to raise a lesser amount, say $3 million, which would be 12% of the company at 25 times earnings. Assume the $3 million in new capital was able to improve earnings from $1 million to 2 million. The overall market value of XYZ is now $50 million, and only 12% of the company has been sold off.
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