Case Study: The IPO Process for Dottie’s Grocery
The procedure through which a private company offers its first shares of stock for public sale is known as an initial public offering (IPO). An IPO is one of the ways a corporation can generate funds for its business operations and/or development by publicly selling shares or stocks. Most firms began as private corporations funded by personal, family, or friend money before expanding into large public companies. A company’s shares are traded to the public on the capital market in order for it to transition from private to public ownership. Underwriters (investment bankers) manage this process and establish the price of the IPO shares (Adam H, 2020). In addition, Initial Public Offerings (IPOs) are an important step in the life of a company. The process of going public in the United States involves several critical events and points-in-time (Ashford, K. & Schmidt, J., 2021).
Case Study
Dottie’s Grocery is a modest firm that operates a full-service grocery store chain with many locations in the city and wants an extra $23 million in investment to expand. The family is evaluating two options: publicly traded debt (corporate bonds) or common stock. In this case analysis, I will analyze the circumstances and advise the firm on the best source of finance. The goal is to recommend solutions that will generate equity value for the firm, maximizing and preserving its worth.
The IPO Process for Dottie’s Grocery
The first step is the filing of a registration statement with the Securities and Exchange Commission (SEC). This document contains the company’s financial information to be shared with potential investors. The company must also provide prospectus documents to potential investors. The SEC then reviews the registration statement, which can take weeks or months, depending on the complexity of the transaction(Ashford, K. & Schmidt, J., 2021).
Ashford, K. & Schmidt, J., (2021) explained, after the SEC review and approval, the company selects an investment banker to act as the underwriter of the offering. The underwriter will conduct due diligence to assess the company’s financial and operating condition. They will also price the offering and create a marketing plan to attract investors.
The next step is the roadshow, during which executives and the underwriter travel to meet with potential investors to discuss the company and the offering. The roadshow typically lasts several weeks and culminates in the setting of the final offering price(Ashford, K. & Schmidt, J., 2021).
After the roadshow, the company will file a final prospectus with the SEC, and the offering will be open to the public. The offering price is usually set at the end of the roadshow and announced publicly that day. The offering will then be available for purchase from the participating brokers (Ashford, K. & Schmidt, J., 2021).
According to Crouhy, M., Galai, D., & Mark, R. (2001), the offering can be completed in as little as a few days, or take several weeks depending on the size and complexity of the transaction. If the offering is successful, the company will have raised capital and become a public company.
The impact and implications of each alternative
Because the firm’s owners are owed to bondholders and are expected to pay both the coupon rate and the face amount upon bond maturity, it may be advantageous for the company to explore selling bonds to potential investors. Debt is often less expensive since interest on debt is taxed, and debt holders’ money will be recovered, whereas stockholders may lose money on their investments. Bonds (debt) have the advantage of being a less expensive source of financing. Bonds can be convertible, according to Don Mayer (2012), in the sense that provisions that allow bondholders to convert bonds into equity shares can be created. As a result, bonds are less risky than debt but provide a lower return on investment. The biggest downside of bonds is that if firms fail to pay bondholders, bondholders can compel corporations to file for bankruptcy.
Because of the bigger stakes involved and the prospect of broader investor attention, the firm is recommended to pick stocks. “A sale of stock provides various benefits for the business, such as avoiding the use of debt, which can be substantially more expensive than selling shares,” according to Don Mayer (2012). Stock sales also raise the firm’s exposure and attract investors who choose higher-risk investments over bonds.”
Other sources of money, such as venture capital and angel investors, might also be considered by the firm. Private equity refers to the contribution of capital by private investors (individuals or businesses) in exchange for a stake in a company. The drawback of this sort of finance is a greater rate of return on investment and/or a strong interest in the company (Don Mayer, 2012).
As a new IPO, how would the guarding of their finance change?
According to Adam H. (2020), if the firm goes public, it must disclose financial, accounting, tax, and other business information, as well as potentially divulge secrets and business processes that might benefit rivals during this disclosure. This is a critical need in the IPO process since the firm will no longer preserve its internal reports.
What are the financial reporting effects of this decision?
Because the corporation will be audited on a regular basis, this choice may result in more openness. Furthermore, this can help the company acquire strong credit scores, which can lead to better credit borrowing conditions than a private or family business (Adam H., 2020).
How will additional debt impact future earnings?
Issuing debt to the general public may result in a catastrophic loss if the firm fails to satisfy the debt payment requirements. According to Managing Financial Resources (2012), utilizing bonds leads in high interest rates in future loan repayment, which is contrary to the company’s initial purpose of generating funds for the firm.
How will new stockholders change the management of the company?
The board of directors and company management must obtain shareholder approval to make strategic decisions that affect a company’s future, such as merger, company sale, changes in the corporate charter, or an increase in the number of authorized shares, etc. The new stock holders will undoubtedly change the management of the company because they participate in the election of the board of directors (Fedorov, 2017).
Conclusion
Finally, the IPO will be successful if the firm Dottie’s Grocery’s market capitalization is equal to or larger than the market capitalization of the rivals within 30 days of the first public offering; otherwise, the IPO’s performance will not be believed (CFI, 2020). I believe that issuing shares for Dottie’s Grocery is a superior alternative because there are no inserts payments. The corporation may also use bonds if control in management is required so that decision-making abilities remain within the family.
References
Adam H. (2020). Initial Public Offering (IPO). Investopedia. Retrieved December 21, 2022, from https://www.investopedia.com/terms/i/ipo.asp
Ashford, K. & Schmidt, J. (2021, August 21). What is an IPO? Forbes Advisor. Retrieved December 20, 2022, from https://www.forbes.com/advisor/investing/initial-public-offering-what-is-an-ipo/
Crouhy, M., Galai, D., & Mark, R. (2001). The essentials of risk management. New York: McGraw-Hill.
CFI. (2020, April 16). IPO Process — A Guide to the Steps in Initial Public Offerings (IPOs). Retrieved December 21, 2022, from https://corporatefinanceinstitute.com/resources/knowledge/finance/ipo-process/
Don Mayer (2012). The Legal Environment and Foundations for Business Law. The Legal Environment and Foundations of Business Law (pp. 942–977). Licensed under a Creative
Commons by-nc-sa 3.0 Retrieved December 21, 2022, from https://2012books.lardbucket.org/pdfs/the-legal-environment-and-foundations-of-business-law.pdf
Fedorov, S. (2017, November 21). What Influence Do Stockholders Have in a Business?
Retrieved May 20, 2020, from https://smallbusiness.chron.com/influence-stockholders-business-20747.html
Note:
This article is written based on University of The People Financial Management (BUS 5111) written assignment by Fristy Tania in November 2022
