What is an IPO and why is it such a big deal? Is this a good idea for JetBlue? Explain.
When a privately held company makes its stock available to the general public for the first time on a securities exchange, this is known as the company’s Initial Public Offering (IPO). The IPO can consist of an initial issue of either debt or equity. The IPO process is also referred to as a private company “going public”. There are numerous benefits associated with going public. IPO benefits include enlarging and diversifying a company’s equity base, allowing cheaper access to capital, improving public image, attracting better management and employees through stock options, enabling transfer of company ownership through mergers/acquisitions, and providing increased financing opportunities (through equity, convertible debt, bank loans, etc.).
IPO Process
Executing an IPO is an extensive, time-consuming, and complicated process for the senior management team of a company. The main steps of the process are outlined below:
• Hire an investment bank as an underwriter—the underwriters’ purpose is to negotiate ways to raise capital (by either debt or equity) and interface with the public. (In JetBlue’s case, the underwriter was Morgan Stanley.)
• Begin to negotiate with the underwriters about all the required information that will be contained in the underwriting agreement. This information includes the amount of capital the company wants to raise, types of securities that will be issued, amount of share divisions, the process of raising capital, etc.
• Create a registration statement containing the IPO description and the company’s financial, management, and legal information.
• Submit the registration statement to the Securities Exchange Commission (SEC).
• Wait while the SEC verifies that all required information has been disclosed and approves the submission.
• Set the