IPOs - Speak The Basics (Very Good Reading) (8)

On the road

The next step in the IPO process is the grueling whirlwind multicity world tour, also known as the road show.

The road show usually lasts a week or two, with company management going to a new city every day to meet with prospective investors and show off their business plan.

The typical US stops on the road show include New York, San Francisco, Boston, Chicago, and Los Angeles.

If appropriate, internationaldestinations like London or Hong Kong may also be included.

How a company's management team performs on the road show is perhaps the most crucial factor determining the success of the IPO.

Companies need to impress institutional investors so that at least a few of them are willing to purchase a significant stake.

The road show is also the most blatant example of how unfair the IPO market can be for the average investor.

Only institutional and big-money investors are invited to attend the road show meetings, where statements regarding a company's business prospects -- discussed only minimally in a prospectus -- are talked about quite openly.

According to the SEC, such disclosures are legal, as long as done orally.

The SEC hasd new rules that, ifapproved, will make it easier for companies to broadcast their road showsover the Internet.

Once the road show ends and the final prospectus is printed and distributed to investors, company management meets with their investment bank to choose the final offering price and size.

Investment banks try to suggest an appropriate price based on expected demand for the deal and other market conditions.

The pricing of an IPO is a delicate balancing act.

Investment firms have to worry about two different sets of clients -- the company going public, which wants to raise as much money as possible,

and the investors buying the shares, who expect to see some immediate appreciation in their investment.

Investment banks usually try to price a deal so that the opening premium is about 15%.

Of course, many hot Internet IPOs have risen much more than that on their first day.

If interest in an IPO appears to be flagging, it's common for the number of shares in the offering or their price to be cut from the expected ranges included in a company's earlier registration statements.

If a deal is especially hot, the offering price or size can also be raised from initial expectations.

Although it is rare, a company can postpone an offering because of insufficient demand.