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Initial Public Offering (IPO): A growth strategy for companies

A private company goes public when it lists its stock for the very first time in a stock exchange, where it can be bought and sold by the general public. This type of transaction is known as an Initial Public Offering, or IPO.

Going public is a growth strategy that many companies start considering at a certain point. It is a momentous decision for any company, with a far-reaching impact on everything from its organization to its daily operations, which entails a tremendous transformation effort and requires thorough planning and preparation.

There are two major reasons for going public: Being able to access capital markets to raise funds to expedite growth and build up the resources needed to develop a business plan; and allowing private shareholders to obtain liquidity, crystallize the value of their shares and diversify their assets. Sometimes, even a combination of both.

But there are other reasons why companies take on this transformational challenge: the company's desire to undertake an institutional process such as this; solidify the company’s relevance beyond its current shareholders; benefiting from the prestige and credibility boost that comes from the voluntary acceptance to abide by market rules before stakeholders; and obtaining an independent valuation of the company as a result of the ongoing scrutiny of its performance.

Additionally, creating a public market for the shares offers additional advantages for a company, and provides it with an additional set of tools. For example, after going public, securities can be leveraged to tackle potential strategic operations, or compensation schemes can be defined, linked to stock price trends, to incentivize the management teams.

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What’s a company’s IPO process like?

Once a company decides to go public in a regulated market, it must take the correct steps to ensure the IPO can be successfully completed. These steps require working simultaneously at different levels:

  • Defining an adequate equity story that develops an attractive investment proposal for investors based on an ambitious but credible business plan, with verifiable milestones and levers, as well as measurable objectives.
  • Corporate Governance bodies must abide by market standards, essential to ensure that minority investor interests are adequately defended and the responsibilities of the Board of Directors clearly defined.
  • Involvement of external players, whose contribution is crucial before, during and after the IPO: investment banks, law firms, auditors, etc. Investment banks, in particular, work on structuring the offer, which includes listing the company's stock in an exchange, the fine tuning and presentation of the equity story and marketing of the offering among potential investors.
  • Defining the appropriate IPO structure, so that its size is attractive and the liquidity of the shares sufficient once they are listed; the balance of the company is consistent with its strategic plan and the Offering geared towards the right type of investor.
  • Continuous monitoring of markets and other potential issues in the primary market while working on the IPO arrangements, which can take between 4 and 6 months, to decide which is the preferable window to launch the transaction publicly.
  • "Price Discovery." Once the Offer has been launched, it is necessary to determine at what price are investors willing to buy shares and issuers to sell them, for which several phases are carried out with interactions with different market agents.  This process involves investment banks, who establish a preliminary valuation; equity analysts, who provide their own valuations based on the information provided by the company, and investors who have shown interest in participating in the IPO.

Once the IPO has been completed, the share’s price trends will reflect the perception that investors have of the company's performance, as it takes its first steps as a listed company, and starts complying with the new obligations and responsibilities that this entails.

BBVA is a benchmark in the Spanish capital market, having led more than 20 IPOs in the last decade and having played a pivotal role in the Spanish market’s privatization process in recent decades. Thanks to its proven track record, experience, and institutional distribution capability, the BBVA Equity Capital Markets team can guarantee excellence in the execution of equity offers.