The Process of Ipo

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A Guide to the Initial Public Offering Process Katrina Ellis (kle3@cornel.edu) Roni Michaely (rm34@cornell.edu) and Maureen O’Hara (mo19@cornell.edu) January 1999 *All Authors are from Cornell University, Johnson Graduate School of Management, Cornell University Ithaca NY 14853. Michaely is also affiliated with Tel-Aviv University. A Guide to the Initial Public Offering Process A milestone for any company is the issuance of publicly traded stock. While the motivations for an initial public offering are straightforward, the mechanism for doing so is complex. In this paper, we outline the process by which companies are brought to market in an initial public offering. Our goals here are to delineate the specific steps…show more content…
The remaining portion of the gross spread (approximately 20%) is used to cover underwriting expenses (underwriter counsel, road show expenses, etc.). If anything remains after deducting all expenses, it is divided proportionately among the underwriter and syndicate members depending on the amount of securities each underwrote. One of the lead underwriter’s first-agenda items (usually before any significant expenses have been incurred) is to draft a letter of intent. Indeed, an important aspect of the letter of intent is to protect the underwriter against any uncovered expenses in the event the offer is withdrawn either during the due diligence and registration stage, or during the marketing stage. Thus, the letter of intent contains a clause requiring the company to reimburse the underwriter for any out-of-pocket expenses incurred during the process. Another important aspect of the letter is the gross spread or the underwriting discount. In most cases, the gross spread is 7% of the proceeds (see Chen and Ritter, 1998 for an excellent discussion of the uniform size of the gross spread). The letter also typically includes: a commitment by the underwriter to enter into a firm commitment agreement (or other underwriting agreements, as the case may be); an agreement by the company to cooperate in all due diligence efforts, and to make available all relevant
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