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Why do companies go public on the stock exchanges?

You must have seen stock prices on the news and asked yourself: “How did this company end up on the stock market?” or “How is the value of a share priced?”. In this article we will clear your doubts and demonstrate in a simple way how a stock exchange works.

Companies that are born, most of the time, need a massive initial investment, or the entrepreneur's time, or even in the form of money to buy machines, equipment, infrastructure, or even a reserve to maintain the cash flow so that they do not close the doors at the first problem that happens. Problems most of the time happen a lot, especially in the initial phase, where the entrepreneur and the business are in the learning phase.

Over the years, if that business works well and consistently makes a profit, the entrepreneur, after developing an effective business model, will likely aim to grow. Then he makes an investment with the company's own capital, which he has accumulated through profit, to open the business in another city. By opening a business in this other city, he manages to recover the investment before the stipulated time and begins to have profits as good as the parent company

When he sees that it works, he does the same process in another city, and his business model is validated again, he manages to pay off the investment before the stipulated time and achieves even greater profits than the two previous stores. The entrepreneur and his group of directors begin to consider in their strategic planning for the following year something aggressive, opening the business in 10 cities, but the company does not have the money for this investment.

What would be the best path for this company?

One of the ways can be through the opening of capital or the “IPO” (Initial Public Offering) of the company in the stock exchange, which counts on the resources of the capital market to grow. The great difficulty in this process, from a privately held company with one or a few partners, to a company issuing shares and debts, or to a publicly traded company with a greater number of shareholders, is meeting deadlines, regulations and, above all, having strong corporate governance.

An “IPO” can take anywhere from 8 months to 3 years. A study carried out by Pwc showed that Brazilian companies spend less time on average in preparing to offer capital, and in their survey, 73% of companies spent less than 6 months in this process. Another interesting point is that compared to the US, in Brazil both the cost of the offer and the recurring costs for going public are cheaper, but it does not have global visibility, as in the American market.

The benefits for a business to go public, according to a Deloitte study, are:

• Access to new financial resources

• Divestment Mechanism

• Business perpetuity

• Improvement in the company's financial and liquidity position

• Increase in the company's competitiveness in the market

• Company visibility and attractiveness

• Improvement of corporate governance practices

Typically the steps for an IPO are:

• Planning and Auditing

These are usually the longest steps in the process, the main reason being the need to audit the company's finances. The legislation requires that, in order to go public, the company has at least 3 years of audited balance sheets. In this phase, the company and its financial advisors define all the characteristics of the operation.

• RoadShow

Meeting to present the company and the offer to the market with the aim of drawing the attention of investors to the business.

• Registration and Listing

This phase includes registrations with CVM and B3, where you must choose your listing segment, as can be seen below.

• Prospectus

It is the most important document of the IPO, where essential information for the investor is presented, dealing with the company and the offering.

• Reservation and Bookbuilding Period

Large investors show their interest during the Roadshows, but for non-institutional investors (individuals, for example), the offers have a reserve period, to indicate how many shares of the new company they want to invest in.

Bookbuilding is the mechanism that considers the amount that institutional investors have indicated they want to buy (and at what value) to establish the price at which the securities will actually be launched.

• D-Day: Debut on the Stock Exchange

Represents the day on which the company's shares will begin to be traded on the trading floor. An IPO can be classified in terms of offering in two types: primary offering (sale of new shares issued by the company on the market) or secondary offering (sale of shares that already existed, belonging to partners who want to reduce their participation in the company).

In order to adapt to the different profiles of Brazilian companies, B3 created 5 listing segments as follows:

• Bovespa Mais

• Bovespa Mais Level 2

• New Market

• Level 2

• Level 1

Throughout this process, the company needs, in addition to experienced executives and a qualified internal team, other experienced professionals, including financial coordinators, lawyers and auditors. The success of the IPO and the company's future depends in part on the talent of the people involved, so it has to strive to keep the most qualified team possible.

Finally, it is important to remember that for a company to reach this IPO process, it is important that it already has a maturity, because the process is complex, the requirements are tough and the opening and recurring costs are not low. However, for a mature and consolidated business with financial barriers to investments, it is the best way to make its growth exponential.

Sources taken from the B3 website, accessed on 05/02/2022: -the capital/



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