A public offering is simply that, a tender or proffer made to the general populous. The item generally being offered is typically a financial instrument, such as equity or debentures which either provide some level of ownership and/or interest in some type of private or public operation. The securities, or pieces of paper that represent the financial interest, are underwritten by a government regulated broker or dealer.
The public or open offering can be made in a number of ways. For oversubscribed deals, preference is typically given to larger institutions who would be considered sophisticated investors and who are also likely to be long term investors. There is always an allocation, typically much smaller, for the retail or individual investor. The amount that is allocated for retail versus institutions can vary from offering to offering.
Dealer driven underwritings have come under some scrutiny of late. This is due to the pricing of the deal that is set by the underwriters. As an example, if a company required a hundred million dollars to expand their operations, they could float a million shares at a price of one hundred. This would be set by the underwriters after they conduct their analysis of what would be considered a fair value and that would also raise the required funds. If investor appetite is greater in the after market and are willing to pay a higher price, one could argue that the initial sale price was set too low.
Post issuance trading activity is vital in determining the success of an underwriting. Often times, investors want to see the value of their company increase. However, if the secondary market demonstrates a significantly higher result, say a 50% plus increase, then clearly the initial price that was set was too low. This means the company could have raised more capital if the price had been set higher. The role of the underwriter is to insure that the issuer receives a fair price, which does not always equate to the highest.
Therefore, in certain cases, instead of having a group of bankers along with a small circle of investors decide on the pricing of a deal, many issuing companies have opted for a dutch auction. Here, the investors bid on the price they are willing to purchase a certain amount of securities. The company then takes all the bids and accepts the price that clears the offering.
Obviously, the company has more direct control over this process and can decide on how many shares to offer at the accepted clearing price. The negative with this is that often times the company has no real control as to the type of investors that get their shares. It is sometimes better knowing that the ownership of your company is in stable hands, but as with all things, there is an associated cost.
Having completed the issuance, the company is now presented with the responsibilities of being a public traded entity. This entails generating and providing periodic financial reports and performance metrics. For a company not used to such scrutiny, it can prove to be burdensome. This can also hamper management performance as now they have to cater to a large constituency with greater demands. It also requires management to have a thick skin from time to time, as now the company is open to criticism from everyone.
The reason for undergoing a public offering is typically to grow a business beyond its current limitations. The process not only provides the entity with much needed capital but is also a brand transforming event. It is a coming out party and gives the company credibility and marketability. In some instances, a public offering is simply an exit strategy for certain private investors who are looking to monetize on their investment. In either case, a public offering is an exciting event and a critical inflection point in the lifecycle of a corporation or entity.
