With the approaching wave of anticipated public offerings for major American companies, led by SpaceX, OpenAI, and Anthropic, the term initial public offering has returned to the forefront of discussion in global financial markets, not only as a technical procedure for listing shares, but rather as a watershed moment in the life of companies, in which they move from limited private ownership to public ownership open to investors.
The importance of this debate increases with estimates indicating that these offerings may add trillions of dollars to the market value of American stocks, in one of the largest listing waves related to technology, artificial intelligence, and space.
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But the great momentum does not eliminate fundamental questions about valuations, profitability, risks, and the ability of markets to absorb companies that are priced today based more on future expectations than on stable current profits.
Below are 8 questions and answers that explain the meaning of an initial public offering, the mechanism for its implementation, its benefits, its risks, and its impact on investor confidence and markets.
1- What is meant by an initial public offering?
An initial public offering is the process through which a private company sells part of its shares to the public for the first time, becoming a company listed on a stock exchange and tradeable among investors.
Before going public, ownership of a company is typically limited to founders, venture capital funds, early investors, and perhaps employees. After listing, individuals, institutions and investment funds can buy and sell the stock in the market.
Economic analyst Mohamed Mamdouh Al-Nawaila believes that the initial offering simply means the company’s transition from limited private ownership to a company whose shares can be purchased by all investors on the stock exchange.
2- Why do companies resort to listing their shares on the stock exchange?
Companies resort to offering for several reasons, the most prominent of which are:
- Raising significant financing without relying entirely on borrowing.
- Expansion financing.
- Entering new markets.
- Pay off debts.
- Product development.
- Funding research and innovation.
- The offering also gives early investors the opportunity to convert part of their paper gains into actual liquidity.
Muhammad Mamdouh Al-Nawaila believes that the IPO becomes not just a means of raising money, but rather a tool to redefine the company before the market, open the door to liquidity for founders and early investors, and link the company’s value to a daily evaluation determined by supply and demand.
Al-Nawaila points out during his talk to Al-Jazeera Net that when a company goes to the stock exchange, it is not only looking for money, but rather for a “certificate of trust” from the market, because listing imposes on it a higher level of transparency and control, which may improve its credit and commercial image and help it later obtain financing on better terms.
3- How is the initial offering process carried out in practice?
The initial offering does not happen with a quick decision, but rather goes through long stages that begin with selecting financial advisors, investment banks, and underwriters, then preparing audited financial statements, preparing the offering prospectus, reviewing the regulatory authorities, determining an initial price range, and then organizing promotional tours for investors.
At this stage, the company presents its investment story:
- How do you generate revenue?
- What are its growth opportunities?
- What size market do you operate in?
- What are the risks?
- What is its ability to achieve profits and cash flows in the future?
4- Who determines the company’s value and share price?
The price is not determined by one party. The company wants the highest possible valuation, investment banks seek fair pricing that guarantees the success of the subscription, regulatory authorities review disclosures, and investors test the price through their actual orders.
Analyst Mamdouh Al-Nawaila points out that the company’s value consists of several elements:
- Company ambition.
- The growth story you are selling to investors, and its financial results.
- And the experience of investment banks in evaluation.
- Then the investors themselves accept this price.
Therefore, the offering may be successful if demand is strong, and the stock may be subject to pressure if the market feels that the price is overstated.
5- What are the most prominent benefits of listing for companies, the economy, and the financial market?
For the company, listing provides significant liquidity that can be used to expand, pay down debt and finance new investments. It also gives it a broader public presence, increases its ability to attract talent through equity programs, and allows the stock to be used as a tool in acquisition and merger deals.
But the interest does not stop with the company. At the economic level, IPOs help transform savings into productive investments, deepen the capital market, increase the number of listed companies, and raise the market’s attractiveness to local and foreign investors.
Major offerings also contribute to making the stock market a broader mirror of the real economy. The more the technology, energy, industry, and services sectors are represented in the financial market, the more the investor will be able to read the trends of the economy through the movement of stocks.
Al-Nawaila confirms that the listing of companies enhances the regulation of the movement of liquidity within the economy, opens the way for foreign flows, and also gives the market greater depth and greater ability to evaluate and compare.
6- What is the impact of the success or failure of major IPOs on investor confidence?
Major IPOs are not only measured by the amount of money they raise, but also by their psychological impact on the market. A successful offering sends a signal that investors are still willing to fund growth, and that the market is capable of absorbing new companies at significant valuations.
Either the failure of the offering, or the stock falling strongly after listing, has the opposite effect. It causes investors to question valuations, causes other companies to postpone listing plans, and prompts investment banks to lower prices or reduce the sizes of subsequent offerings.
Here the sensitivity of the upcoming proposals of companies such as SpaceX, OpenAI, and Anthropic appears. These companies do not represent ordinary listings, but rather test the market’s appetite for high-growth, but also high-risk sectors, such as artificial intelligence and commercial space.
Here, Al-Nawaila indicates that the market may accept pricing for future growth (an assessment based on future expectations), but it becomes more cautious when the gap between the investment story (promises of future growth and expansion) and the actual financial results widens.
7- What are the largest initial public offerings in the history of global markets?
The global financial markets witnessed a number of giant IPOs whose value exceeded tens of billions of dollars, the most notable of which was:
- The listing of Saudi Aramco in December 2019, which raised $25.6 billion from the sale of 3 billion shares, before rising to about $29.4 billion after activating the additional allocation option, becoming the largest initial public offering in history, surpassing all previous listings.
- Before Aramco, the lead was held by the Chinese company Alibaba, which raised $21.8 billion when it was listed on the New York Stock Exchange. In 2014, before the proceeds of the offering rose to $25 billion after selling additional shares.
The markets witnessed other huge offerings such as:
- Japanese company SoftBank was valued at $21.3 billion in 2018.
- The $17.8 billion AIA Insurance Group in Hong Kong 2010.
- The American company Visa was valued at $17.3 billion in 2008, despite the IPO occurring during the global financial crisis.
- Facebook managed (currently dead) raised $16 billion in 2012
- The American company General Motors was able to raise $15.8 billion in 2010
- The Industrial and Commercial Bank of China raised $14 billion in 2006, before the proceeds of the offering later rose to about $21.9 billion.
These numbers reflect a shift in the nature of companies capable of leading major IPOs. While energy, communications, and banking companies dominated during the past two decades, attention today is turning to artificial intelligence and space companies.
Market estimates indicate that the upcoming IPOs of SpaceX, OpenAI and Anthropic could add up to $4 trillion to the market value of US stocks.
8- Has the IPO environment become more difficult in light of the volatility and high interest rates?
Higher interest rates usually make the IPO environment more difficult, because the investor is able to get a better return from less risky instruments such as bonds and deposits. High interest also puts pressure on the valuations of growth companies, especially those whose value depends on expected profits in the distant future.
But the picture is not always the same. If markets begin to expect a rate cut or monetary stability, investors’ appetite may return to offerings, especially in sectors with strong growth stories such as artificial intelligence and advanced technology.
Al-Nawaila believes that the markets are not only looking for companies that achieve traditional returns, but rather have become thirsty for growth companies with big stories, such as artificial intelligence and space. So companies like SpaceX, OpenAI, and Anthropic may find strong demand, even in a volatile environment, if investors are convinced that their future growth justifies their current valuations.
He emphasizes that this does not mean the absence of risks, as the initial public offering does not guarantee success, nor does it automatically turn the company into a safe investment, but rather puts it under the daily market test, where profits, cash flows, governance, disclosure, and management’s ability to implement promises become decisive factors in determining the fate of the stock after listing.
