Investment bankers take the company on a "road show", essentially
pitching the company to potential investors (note that the potential
investors are groups like pension funds and mutual funds, not retail
investors). Through that process and other means, the banks begin
"building a book" of buyers who are willing to buy X shares at Y
price. This helps the IPOing company decide where to set its IPO
price. In some cases, the I-bank also guarantees a minimum amount the
company will raise.
As to why a company goes public, there can be many reasons:
1) They have to (Google only went public b/c an obscure SEC regulation
essentially forced them to start behaving as a public company)
2) Going public tends to immediately increase the value of ownership
in the company (putting aside any sort of price spike, speculation,
etc.... ownership stake in a private company is very illiquid... you
can't get rid of it easily. Transforming your ownership into liquid
shares instantly raises their value).
3) Going public brings in needed capital without adding debt.
4) Going public gives the company a "free" currency (its shares) to
use in transactions with other firms. |