Ever wondered how you could own a piece of some of the biggest companies in the world—or even in your own country? That’s where Initial Public Offerings (IPOs) come into play. IPOs are the moment when private companies invite the public to share in their success. With Ethio Telecom’s IPO offering now available, we’re here to simplify the process and show you how it works.
What is an Initial Public Offering?
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Great ideas don’t become billion-birr businesses overnight. To raise equity, companies go through several funding phases, from personal savings to sourcing private investors. An IPO is one way of funding, where a privately owned company offers its stock to the general public, transforming from a few owners to potentially hundreds or thousands of owners, depending on the company’s size.
Why Do Companies Go Public?
The primary reason companies go public through an IPO is to raise capital. This capital can be used to:
- Fuel Growth: Companies can use the funds to expand their operations, either by launching new products, entering new markets, or acquiring other businesses.
- Pay Off Early Debts: Going public can help a company pay off debts it accumulated in its early stages.
- Reach More People: Public companies often gain more visibility and credibility, which can help them attract new customers, partners, and employees.
- Liquidity for Owners: IPOs allow founders and early investors to sell their shares and cash out after years of investment, giving them a return on their initial commitment.
How Does the IPO Process Work?
Once the business develops, it seeks to grow further possibly through an IPO. The first step in the IPO process is for the company’s leadership to make the decision to go public. The company then engages with an underwriting firm (a financial institution that helps manage and launch IPOs), typically an investment bank. This firm helps the company throughout the process.
The company and the investment bank work together to determine key details, such as the initial price of the stock, the number of shares to be issued, and the percentage of ownership to be offered to the public. Once these details are finalised, the investment bank assists the company in listing its shares on a public stock exchange, such as the Ethiopian Securities Exchange (ESX), making them available for public purchase.
A recent example of this process unfolding in Ethiopia is Ethio Telecom’s Public Offering. Starting October 16th, the Ethiopian government is offering 10% of Ethio Telecom directly to its citizens, with 100 million shares available at a price of 300 Birr per share. This marks the company’s Initial Public Offering (IPO), where citizens can invest in a company that has dominated the telecommunications business in Ethiopia for over a century until recent years.
Ethiotelecom has chosen not to put intermediaries between their trading, obtaining a securities brokerage license to sell their IPO shares directly. This allows them to list their stocks on their own application, Telebirr. The way this process works is relatively straightforward Shares will be listed on the app just like any other product or service. That capital could be used for network expansion, investment in 5G, or even the launch of entirely new services.
The Impact of Initial Public Offerings on Stock Markets
Imagine the stock market as a garden, where different plants (companies) bloom. Each time a new IPO is introduced, it’s like planting a seed in this garden. With time, that seed can grow into a plant, adding to the beauty and diversity of the garden. However, just as some plants flourish while others struggle, the impact of an IPO can vary, influencing the overall garden.
In our garden, imagine that to plant a new seed-that is, an IPO-you need to hire various gardeners-intermediaries-who help you prepare the soil. When these gardeners’ fees become too high, there is clearly a disincentive on new seeds being planted, hence slowing growth in your garden. This means high investment bank costs may discourage companies from going public, that is entering the stock market. Moreover, an over-hyped seed—say one promised to grow into a big tree when it is just a small plant-gardeners overpay for the seed, expecting huge returns, hence tumbling stock prices and eventual losses among investors.
But IPOs don’t just impact individual companies—they add value to the whole stock market. Here are some key ways:
With each new IPO, the number of shares available in the stock market increases, making it easier for investors to trade. This increase in trading options can make the stock market more active, attracting more people to invest.
Furthermore, The price set for an IPO helps show what people think the company is worth, which can influence the prices of other stocks. A well-priced IPO might encourage confidence in the market, while a low price might make investors cautious. This pricing is part of the market’s way of finding balance and helps set a guide for the future.
IPOs often generate excitement and popularity, which can affect how investors feel about the whole market. A successful IPO can create a positive mood, while a disappointing one may make investors cautious. Take Beyond Meat’s IPO in 2019, for instance. This plant-based food company’s IPO saw a huge rise because investors were excited about the future of plant-based foods. This excitement not only benefited Beyond Meat but also stirred interest in the entire plant-based industry.
Each IPO adds its own touch to the “garden” of the stock market, helping it grow in unique ways. Whether through new trading opportunities, influencing market prices, or setting trends that capture public attention.
In conclusion, Initial Public Offering (IOP) is like a grand Ethiopian festival-dynamic, full of promise and a chance for everyone to participate in something big. Just as the festival brings joy, IPO opens doors for companies to grow while offering investors a thrilling opportunity. We hope you enjoyed this simplified article. Stay tuned to our page to explore more concepts and insights in the world of finance!
By: Gelila Abu
