While underpricing varies greatly from transaction to transaction, it represents a significant opportunity cost for firms undergoing the IPO. research found that, Ritter’s from 1977-1982, the average underpricing was 14.8% for firm (“initial return”) commitment IPOs and 47.8% for best efforts IPOs. While analysis showed a Ritter’s significant difference in underpricing for the two different IPO processes, the important takeaway is that underpricing is both present and sizeable for IPOs, regardless of the type. The combination of these direct and indirect costs reflects a significant negativefor companies undergoing an IPO. Before even beginning the IPO process, shareholders of a privately held firm must choose between going public or staying private as the company matures. The opportunity to cash out, raise capital for new undertakings, pay down debt, or significantly increase liquidity motivates private shareholders to even though going public is often “go public”, associated with the costly and lengthy process of an IPO. An important alternative route to get access to the public market is sometimes ignored by shareholders and management teams. Instead of an IPO, a company can undergo a reverse takeover (RTO). According to the SEC, a reverse takeover, also known as a reverse merger, is a transaction where existing public which is a public reporting company with few or no “an ‘shell company,’ operations, acquires a private operating company usually one that is seeking access to – funding in the U.S. capital and Exchange Commission [SEC], 2011, markets” (Securities p.1). These public firms usually are companies that were left from previous transactions where certain operations were sold, that entered bankruptcy, or that were simply created
While underpricing varies greatly from transaction to transaction, it represents a significant opportunity cost for firms undergoing the IPO. Ritter’s research found that, from 1977-1982, the average underpricing (“initial return”) was 14.8% for firm commitment IPOs and 47.8% for best efforts IPOs. While Ritter’s analysis showed a significant difference in underpricing for the two different IPO processes, the important takeaway is that underpricing is both present and sizeable for IPOs, regardless of the type. The combination of these direct and indirect costs reflects a significant negativefor companies undergoing an IPO. Before even beginning the IPO process, shareholders of a privately held firm must choose between going public or staying private as the company matures. The opportunity to cash out, raise capital for new undertakings, pay down debt, or significantly increase liquidity motivates private shareholders to “go public”, even though going public is often associated with the costly and lengthy process of an IPO. An important alternative route to get access to the public market is sometimes ignored by shareholders and management teams. Instead of an IPO, a company can undergo a reverse takeover (RTO). According to the SEC, a reverse takeover, also known as a reverse merger, is a transaction where “an existing public ‘shell company,’ which is a public reporting company with few or no operations, acquires a private operating company – usually one that is seeking access to funding in the U.S. capital markets” (Securities and Exchange Commission [SEC], 2011, p.1). These public firms usually are companies that were left from previous transactions where certain operations were sold, that entered bankruptcy, or that were simply created