How does a company raise capital from an IPO?

Jan 29, 2017
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#1
If it is the owners of the company that profit from selling their shares to the public, how does that benefit the company? How does that raise capital for the company if the owners get all the money? Everywhere I read that one of the main reasons why companies decide to go puclic, is to raise capital so they can grow. But how?? :)
 

malaguti

Well-known member
Nov 3, 2009
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#2
If it is the owners of the company that profit from selling their shares to the public, how does that benefit the company? How does that raise capital for the company if the owners get all the money? Everywhere I read that one of the main reasons why companies decide to go puclic, is to raise capital so they can grow. But how?? :)
"if the owners get all the money?"

the owners don't get all the money, the company does. if you buy shares in this new IPO then the company has raised money, surely?
you pay for each share, the company has raised its cashflow..lots of people buy their shares, the company has raised lots of money..

the net effect is zero, ie the company still owes you however that debt to you is generally in the form of dividends. The company has raised money, and has also increased its capital liability at the same time
 
Jan 24, 2017
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#3
If it is the owners of the company that profit from selling their shares to the public, how does that benefit the company? How does that raise capital for the company if the owners get all the money? Everywhere I read that one of the main reasons why companies decide to go puclic, is to raise capital so they can grow. But how?? :)
With an infusion of cash derived from the sale of stock, the company may grow its business without having to borrow from traditional sources, and it will thus avoid paying the interest required to service debt. This "free" cash spent on growth initiatives can result in a better bottom line
 
Jan 29, 2017
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#4
But the company does not own their shares which are sold - the owners do, right? So the owners get the price paid for the shares - not the company. Then how does the company profit from this? Am I missing something?
 

malaguti

Well-known member
Nov 3, 2009
2,239
414
93
#5
But the company does not own their shares which are sold - the owners do, right? So the owners get the price paid for the shares - not the company. Then how does the company profit from this? Am I missing something?
you are missing a few things, hopefully this will make sense what i say

when a company decides to float, they decide how many shares they will make available to the public. lets say 1000,000 shares

when it goes public the company sets a "notional" valuation of the new public price for each share..so now lets say I'm going to float my company for £2 per share, and lets say I manage to sell all my shares

what has happened? The money in the company bank account has increased by £2m, and the amount the company must pay to the shareholders also now increases by £2m. the "owners" are now not the owners of the company anymore, the shareholders are.
now, the company has just got £2m to spend, the "owners" have not necessarily received anything. I say necessarily because the company would already have had an allotted share capital, and these too become worth £2 per share, but not £2m worth

now as has been said earlier, there is a cost to floating 1m shares, and that cost is dividend payments. the floating of shares is nothing more than a very large loan to the company, and like any loan comes at a price. the company is not making any profit from this IPO. it is simply raising cash in the form of a "loan" from shareholders. each and every shareholder is a creditor of the company

does that make sense? the owners are now not the owners (all depends on majority shareholding) and they are simply directors, or CEO, CIO, CFO etc they have not received £2m. the company has. as soon as a company becomes a public company, there is a very clear distinction between the directors and the company itself