View metadata, citation and similar papers at core.ac.uk brought to you by CORE Комунальне господарство міст, 2015, випуск 119 ISSN 0869-1231 UDC 336.767.2 N.O. Chekh O.M. Beketov National University of Urban Economy, Kharkiv IPO PROCESS: GLOBAL TENDENCIES AND UKRAINIAN EXPERIENCE, RISKS AND THEIR MITIGATION Today Ukrainian economy is in desperate need of investment, but the state is not able to provide it, so the hopes are rested on foreign investments. One way to attract foreign investment is the Initial Public Offering (IPO) – proposal of shares, which the company makes to all interested investors. Still this process is aligned with certain difficulties and disadvantages. In the article the analysis of global and Ukrainian IPO-experience is carried out. Possible ways of IPO conduction for Ukrainian companies are studied. Main IPO risks and measures of their mitigation are identified. Deployment of the 6 stages of IPO process is offered. Keywords: Initial Public Offer, investment, risk, threat, exchange, share, financial and economic security, risk mitigation. Problem statement companies to enter the stock market, the ability to raise funds through public offering both on domestic and On their way to growth and prosperity many foreign stock exchanges remains unrealized. This is due companies come to a stage when further business to the lack of experience of Ukrainian companies on the expansion at their own expense and on account of the stock markets and the lack of understanding of the loans becomes too expensive, impossible or simply content of the IPO-process, its advantages and deficient. This often poses the question of raising capital components. The management of domestic enterprises through the stock market, including an initial public is wary of requirements of developed stock markets, of offering. conducting transparent business and of the risks that Initial public offering (IPO) is one of the main and accompany the access to the international capital most reliable tools of financial investments attraction, market, ignoring the significant opportunities that are which allows company’s development and current open to the public companies. activities funding with relatively cheap resources of the Under European integration process IPO is stock market. particularly attractive mechanism of fund-raising for Going public offers great opportunities for Ukrainian business, and that makes the research of its business development. Through public offering of the main points, risks and measures that ensure financial company can attract additional capital, at the same time and economic security of the company in the course of strengthening its structure and reputation, as well as the public offering very important. integrating into the global capital market. Owners are also interested in diversification that will increase the Analysis of recent research and publications market value and liquidity of investments, while In general IPO matters and its functionality were reducing risks. However, IPO involves accepting some investigated by many experts, including J. Bardeena, obligations and liabilities to the community and K. Grynyuk, V. Kuks, T. Kutovy, J. Ritter, M. Rubaha, individual shareholders relating financial reporting, T. Yasinska and others. Still available sources are corporate structure, reporting history and ownership insufficient to full disclose IPO-mechanism of structure. Ukrainian companies and associated risks and their At present global IPO market finds itself on the impact on the financial and economic security. upswing. IPO issuance in 2014 reached the highest At our opinion, domestic scientists give not levels since 2010. Annual IPO proceeds increased enough attention to drawbacks of the IPO-process, 48,7% to $204,8 billion. Global IPO returns were also focusing mainly on advantages and benefits of going impressive in 2014. The average IPO generated a 15% public. While besides great opportunities IPO return from their offer price. With issuance accelerating candidates face serious threats and downsides that can and returns strengthening, analytics expect to see global have a significant impact on company’s operations. IPO markets continue to gain momentum and grow in The purpose of this article is the study of the 2015 [7]. theoretical and methodological principals of IPO in Despite the previous attempts of Ukrainian Ukraine and abroad, analysis of the main obstacles, 78 © N.O. Chekh The operation and development of businesses economic security risks and threats to the financial and economic security period of mobilization. of domestic companies associated with the conduction But the most important is the market development. of initial public offering, development of IPO promotes economic growth in Ukraine altogether. recommendations to mitigate them. Domestic business requires long-term placement of funds needed for economic development and Presentation of the main material improvement of the investment image of the country. Raising funds through an initial public offering - is IPO market, in this respect, is one of the new and one of the most important and critical decisions that can promising ways of attracting foreign capital. Massive be made by the company during its existence. By IPO conduction helps active movement of capital in the offering shares on the exchange, management will economy, enables structural transformation, and attracts obtain necessary capital for further investment in the significant investments. development of the company, for shareholders IPO will Nevertheless, besides advantages IPO process be an additional source of liquidity of their assets, involves a number of disadvantages and drawbacks that investors will significantly increase their market can be arranged into such groups: position. ‒ financial – include considerable expenses Cambridge Business English Dictionary defines (listing committees, legal and professional costs, initial public offer as the first sale of company’s share to expenditures for compliance with standards); the public [1]. According to the Merriam-Webster underpricing of company’s stock; risks connected with Dictionary IPO means the first time a company’s stock volatility of the capital market; is offered for sale to the public [3]. The most complete ‒ organizational – consists of long duration of the definition provides Oxford Business English Dictionary, process of fund-raising; risk of class action lawsuits which determines initial public offer as an act of from investors; disclosure of sensitive information; offering the stock of a company on a public stock probability of nonconformity with rules and standards exchange for the first time [6]. applicable to a public company; In Ukraine, the concept of IPO is interpreted more ‒ structural – includes constant pressure on the broadly. In national legislation, in particular art. 28 of behalf of investors, analysts and market; the necessity of the Law of Ukraine "On Securities and Stock Market", adopting strict market standards; the loss of control initial public offering – is a disposal of securities based because of increasing number of co-owners; strategic on publication in the media or announcement in any risks (associated with new investment projects possible other way the notice of sale of securities, addressed to due to IPO); removal of generous compensation not defined in advance number of people [5]. packages for managers; The National Commission on Securities and Stock ‒ external – concerned with certain loss of liberty Market defines public offering as placement of shares of and privacy. public joint stock company among the investors, in In spite of these shortcomings, IPO is one of the which the shares offer is addressed to more than 100 most practical mechanisms of capital mobilization and individuals and/or entities other than shareholders, allocation in the advanced economies. while existing shareholders of the issuer have no pre- Before IPO the companies attracted capital from a emptive rights on purchasing these shares [4]. This way, small number of investors that could not sell their shares the IPO include the first and all subsequent placement in illiquid markets. With the development of a liquid of equity securities of the certain issuer that are market companies were able to get funds through a addressed to the general public and are made in the public offering on favorable terms from a wide range of course of issuance of securities by public subscription or diversified investors. through their public trading on stock exchanges and For the first time joint stock company offered its other securities marker operators. shares on the stock exchange for private investors, Any company that executes IPO is pursuing at banks and investment trusts in the early XVII century in least three goals: attraction of investments, determining England and Holland. The first company that made an its market capitalization and increasing the rating of the IPO is considered Dutch East India Company, which company by obtaining public status. Also public has attracted so about 6.5 million guilders in the early offering may be a practical way to reduce debt level, 1600s. In the United States, the first IPO was the public given the difficulties in obtaining a bank loan. offering of the Bank of North America in 1783. Compared to alternative sources of capital raising But the real heyday of classical IPO was the (retained earnings, budget and government loans, bank middle of the nineteenth century, when originated