Definition
Flotation is the process through which a privately-held company becomes a publicly-traded company by issuing shares to the public for the first time. This is commonly referred to as ‘going public’ or an Initial Public Offering (IPO). The key purpose of flotation is to raise new capital for company operations, expansion, or to allow existing shareholders to realize their investments. Once the shares are floated, they can be traded on a stock exchange, providing liquidity to the shareholders.
Examples
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Alibaba Group IPO (2014): Alibaba Group went public on the New York Stock Exchange (NYSE) with a record-breaking IPO, raising approximately $25 billion. This flotation allowed Alibaba to invest in new ventures and expand its global reach.
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Facebook IPO (2012): Facebook’s IPO raised $16 billion, providing the company with significant capital to fund its expansions and new initiatives. This flotation also gave early investors, including employees, an opportunity to sell their shares.
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Uber IPO (2019): Uber went public on the NYSE, raising $8.1 billion. This move helped Uber bolster its financial position and further expand its business operations.
Frequently Asked Questions (FAQs)
What are the benefits of flotation for a company?
Flotation can provide numerous benefits including access to a pool of investment capital, increased public awareness and credibility, ability to hire high-quality talent using stock options, and providing an exit strategy for early investors.
What are the different methods of flotation?
The methods of flotation include:
- Introduction: Shares are introduced to a stock exchange without raising funds.
- Issue by Tender: Shares are sold to the highest bidders.
- Offer for Sale: Shares are sold to the public at a fixed price.
- Placing: Shares are sold to a small group of institutional investors.
- Public Issue: The shares are offered to the entire public.
What are the risks associated with flotation?
Some risks include the pressure of quarterly financial reporting, potential loss of control, increased regulatory scrutiny, and the significant costs involved in the IPO process.
How does flotation affect a company’s capital structure?
By issuing shares to the public, flotation can significantly alter the company’s capital structure, moving from private ownership to having a diverse set of shareholders. This also dilutes the ownership interest of existing shareholders.
How long does the flotation process usually take?
The time required for flotation can vary widely, but it typically takes around six months to a year, depending on regulatory approvals and market conditions.
Related Terms
Initial Public Offering (IPO): The first sale of stock by a private company to the public.
Capital Market: The financial market for buying and selling equity and debt instruments.
Underwriter: A financial institution or investment bank that manages the issuance of new securities.
Public Company: A company that has issued securities through an initial public offering and trades on at least one stock exchange or over-the-counter market.
Stock Exchange: A market where securities are bought and sold.
Online References
- Investopedia - What is an Initial Public Offering (IPO)
- Financial Times - How Does a Company Go Public?
- Nasdaq - Understanding the IPO Process
Suggested Books for Further Studies
- “The IPO Playbook” by Steve Cakebread: A comprehensive guide to the procedures and techniques for executing a successful IPO.
- “Investment Banking: Valuation, Leveraged Buyouts, and Mergers & Acquisitions” by Joshua Rosenbaum and Joshua Pearl: Covers the entire IPO process from the perspective of investment bankers.
- “Equity Asset Valuation” by Jerald E. Pinto, et al.: Provides insights into valuing equity securities, which is crucial for IPO evaluation.
Accounting Basics: Flotation Fundamentals Quiz
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