An IPO is an initial public offering, when a company makes its shares available for public trading, and it’s quite different from an acquisition. IPOs are synonymous with entering a new market, while an acquisition is typically when a larger company takes over a smaller target company.
What does IPO mean vs. an acquisition? When a company applies for an IPO, it entering into the traditional process to be listed on a public exchange and get funding from individual investors. In an acquisition, or takeover, the target company may not survive — or it may thrive, but only as part of the newly combined organization.
Investors contemplating companies at these two different stages would do well to think through the benefits and risks.
How IPOs Work
When companies go public it’s when a private company decides to sell its shares to raise capital to fund growth opportunities for the company; create more awareness about the company; or to acquire other businesses, among many other possible reasons.
The IPO is the process of selling securities to the public. The company decides how many shares it wants to offer. The price of the company shares are determined by the company’s valuation and the number of shares at listing, and the funds raised by the IPO are considered IPO proceeds.
Once the IPO is approved, the company is then listed on a public stock exchange where investors can buy shares of the IPO stock.
Advantages of Going Public
What are the advantages of going public? There can be many, which is why companies aspire to go through this arduous process.
Capital for Investment
The biggest advantage associated with an IPO is fundraising. Once investors start buying IPO stocks, the proceeds from an IPO can be substantial. The company then takes this capital and typically uses it toward internal investments and expansion. The company can use the funds it raises for research and development, to hire more staff, or expand its operations in other states or countries. There are a variety of ways this new capital can be deployed to benefit the company.
Publicity
IPOs generate a lot of publicity. This, in turn, can drive more attention to the company and make investors interested in purchasing shares of its stock. IPOs are frequently covered in business news, which adds to the IPO buzz.
Valuation
Many companies that go public can end up having higher valuations. Because the public company has access to more capital and steadily grows its business, the shares of the company can increase in price over time.
Disadvantages of Going Public
What are the disadvantages of going public? There are a series of steps and regulations companies must adhere to in order to have a successful IPO — and the process can be time consuming and difficult.
High Cost
The first factor a company must consider is cost. The company needs to work with an investment bank, which will charge underwriting fees — one of the largest costs associated with an IPO.
Underwriting is mandatory to review the company’s business, management, and overall operations. Legal counsel is also required to help guide the company through the IPO. There are also costs associated with account and financial reporting. Companies will also accrue fees for applying to be listed on the exchange.
Not Enough Information for Investors
From an investor’s perspective, investing in an IPO can also be a challenge. In many cases, individual investors don’t have enough information or historical data on the company’s performance to make a determination on whether an IPO is a sound investment.
Stock Market Stress
Once a company goes public, it is now part of the public market. This means it is subject to scrutiny, market volatility, and investor sentiment. Every move and decision the company makes, such as a corporate restructuring, merger and acquisition, change in leadership, or release of earnings reports, will be reviewed closely by industry analysts and investors, who will provide their own opinions on whether the company is operating well or not.
While the company’s leadership may not have had to worry about these aspects when it was private, a public company needs to keep these market pressures top of mind.
What Is an Acquisition?
What does it mean for a company to be acquired? Similar to a merger, an acquisition is when one company buys a portion or the whole of another company and all its assets. An acquisition is the process of the acquiring company taking full control of the target company.
If the acquiring company takes more than 50% of the target firm’s shares, this gives the acquiring company control over decision making regarding the target company’s assets. While acquisitions of well-known and larger companies occur and are covered by the news, companies of any size can be the acquiring company or target company.
Advantages of Being Acquired
Being acquired doesn’t have to signal the end of a company — sometimes it can be a lifeline.
Growth
An acquisition can be a strategy for a company to grow into new markets and quickly become a leader in its industry. If the company is working in a competitive landscape, an acquisition helps increase its value and can add to a company gaining more market strength.
Innovation
When one company acquires another, this allows resources and experiences to come together. This may enable the new company to innovate new ideas and strategies that may eventually help grow the company’s earnings. This new partnership can bring together a new team of specialists and experts that can allow the company to develop and reach its goals.
More Capital
When an acquisition occurs, this will increase the cash holdings and assets of the acquiring company and usually allows for more investment in the newly formed company.
Opportunities With IPOs
Investing in IPOs can be a great opportunity for individual investors to get in at an early stage of a company’s growth. When you participate in an IPO, investors purchase shares at the stock’s offering price before it begins trading in the secondary market. Prior to investing in an IPO, it’s important to do your research to make sure you understand the risks of the investment.
Disadvantages of Being Acquired
It’s hard to avoid the negative implications of an acquisition, and investors need to consider these as well.
Conflicting Priorities
In some acquisition scenarios, there may be competing priorities between the two companies that come together. The acquiring company and target company prior to the acquisition were used to working as individual entities. Now, as a newly formed company, both sides must work together to be successful, which is easier said than done. If there isn’t alignment on the goals of the organization as a whole, then there is a possibility that the acquisition may fail, or the transition could be rocky and prolonged.
Pressure on Existing Partnerships
When an acquisition occurs, the newly formed company becomes bigger and it is likely that their goals will grow as well. In the case where the company wants to develop more products to expand into new markets, this could require their suppliers to figure out how they are going to ramp up production to meet the demand.
For example, this could mean the supplier would need more capital to hire staff or purchase additional equipment and supplies to prevent production issues.
Brand Risk
Depending on which companies come together, if one has a poor reputation in their industry, the acquisition could put the other company’s brand at risk. In this case, both of the companies’ identities could be evaluated to decide whether they come together under one brand or are marketed as separate brands.
The Takeaway
Initial public offerings (IPOs) and acquisitions often get a lot of media and investor attention because they can offer opportunities for investors. That said, these two events are quite different.
An IPO is when a private company decides to go public and sell its shares to individual investors, whereas an acquisition is when a company buys out another, target company. In this case the acquiring company may gain certain market advantages, and the target company will typically lose its decision-making privileges since it is no longer an individual company.
There are a number of pros and cons to IPOs, just as there are advantages and disadvantages of a company being acquired. IPOs can provide a newly minted public company with a lot of growth opportunities — but the IPO process is expensive and time consuming, and being beholden to regulators and investor sentiment is never a picnic.
Acquisitions can be a lifeline to a company that’s struggling in a competitive market. While the takeover can effectively eliminate the target company as an independent entity, its products or brand may continue to exist.
If you’re interested in setting up your own portfolio, and including IPO shares, you can open an Active Invest account with SoFi Invest and get started right away. Why wait? The market is full of opportunities, and once you know your priorities, you want to be able to take action.
FAQ
Is an acquisition an IPO?
An acquisition is not an IPO. An acquisition is when an acquiring company purchases part of or all of a target company to form one new company.
What is the difference between an IPO and a takeover?
An IPO is when a private company decides to go public and sell its shares to individual investors, whereas a takeover is when a company buys out another company.
Is a takeover an acquisition?
An acquisition can be a takeover. This is when two companies decide to come together and become one entity. All the assets of both companies are now part of a newly formed combined company.
Photo credit: iStock/Yuri_Arcurs
SoFi Invest®
The information provided is not meant to provide investment or financial advice. Also, past performance is no guarantee of future results.
Investment decisions should be based on an individual’s specific financial needs, goals, and risk profile. SoFi can’t guarantee future financial performance. Advisory services offered through SoFi Wealth, LLC. SoFi Securities, LLC, member FINRA / SIPC . SoFi Invest refers to the three investment and trading platforms operated by Social Finance, Inc. and its affiliates (described below). Individual customer accounts may be subject to the terms applicable to one or more of the platforms below.
1) Automated Investing—The Automated Investing platform is owned by SoFi Wealth LLC, an SEC registered investment advisor (“Sofi Wealth“). Brokerage services are provided to SoFi Wealth LLC by SoFi Securities LLC, an affiliated SEC registered broker dealer and member FINRA/SIPC, (“Sofi Securities).
2) Active Investing—The Active Investing platform is owned by SoFi Securities LLC. Clearing and custody of all securities are provided by APEX Clearing Corporation.
3) Cryptocurrency is offered by SoFi Digital Assets, LLC, a FinCEN registered Money Service Business.
For additional disclosures related to the SoFi Invest platforms described above, including state licensure of Sofi Digital Assets, LLC, please visit www.sofi.com/legal.
Neither the Investment Advisor Representatives of SoFi Wealth, nor the Registered Representatives of SoFi Securities are compensated for the sale of any product or service sold through any SoFi Invest platform. Information related to lending products contained herein should not be construed as an offer or prequalification for any loan product offered by SoFi Bank, N.A.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Claw Promotion: Customer must fund their Active Invest account with at least $10 within 30 days of opening the account. Probability of customer receiving $1,000 is 0.028%. See full terms and conditions.
SOIN0422050
