Flotation

Companies in the private sector consist of two basic types: public and private. Public companies in general are large scale organizations such as banks, insuarance companies and privatised companies. The nubber of public companies are fewere than that of private companies. Private companies on the wholw are smaller or family-run business.

The difference between public and private firms on paper at least, can be found in their manners the word “limited” (often shortened to “Ltd”) after a company’s name shows that it is private. On the other hand, the status of a public company is shown by the letters “plc” after its name. This is short for “public limited company”. In practice, however, the real difference between the two arises from the fact that private companies cannot raise money by selling shares, in contrast to public companies which can do so by issuing shares and bonds to be offered for sale on the stock Exchange.

A public limited company (plc) is the only type of business organisation whose shares can be traded on the stock market. The process of becoming a public limited company is commonly reffered to as flotation – the shares in the company are “floated” on the stock market.

When a company decides to float on the market it will appoint a financial advisor, usually a merchant bank, to help it through the process. The key role of the advisor will be also to advise on the prise at which shares are to be offered for sale. Once an offer price has been decided, a glossy prospectus will be produced to aid the sale of the firm’s shares. The prospectus will include details of:

– what the firm plans to do with the money it is trying to raise;

– a fully audited financial statement of the firm’s current financial position and history;

– details of where the shares being offered to the market are coming from – they may be newly created shares or alternatively shares that are owned by existing shareholders.

The prospectus will also include an application form, to be filled out by anyone wishing to purchase shares. Those applying will fill out the form, stating how many shares they wish to purchase and send off a cheque to cover the cost of those shares. On the day of flotation, the results of the application process will be announced. The company will declare how many of the shares being offered have been sold, with any unsold shares being purchased by the underwriter.

Each new share will be underwritten, usually by the bank offereing advice to the company floating. The underwriter will charge a fee, which is often set as a percentage of the sum the company hopes to raise by floating. In return, the underwriter will guarantee to buy any shares that are unsold from the original application process.

Immediately the resultts of the isssue have been publicized, trading in shares is likely to start on the market. The original issue price will be the stating price, but this may change dramatically within minutes, particularly if the share issue was under or oversubscribed. An oversubscribed offer will see investors looking to offload their overpriced shares in an attempt to cut their lossses.