Developer Library: what is an IPO and why do they resort to it?

Kirill Perevozchikov

This month, two notable gaming companies — Roblox and tinyBuild — have placed their shares on stock exchanges.

This is a good reason to talk about entering the stock market in general, and in particular about the IPO.

What is an IPO?

An IPO is an initial public offering of a company’s shares on the stock exchange or, to follow the literal translation of the term from English, an Initial Public Offering.

It’s about the process during which:

• a) new shares are being issued;
• b) the company’s shares are available for purchase to all market participants. Usually, the latter refers to institutional investors (as a rule, various funds interested in making money on the difference between the stock price at the time of purchase and at the time of sale) and private investors (individuals who work with the market through brokers);
• c) the company goes from private to public: information about its activities is open to everyone (just from such public documents we know how much and what Activision Blizzard or Electronic Arts earns). This ensures a certain level of transparency of the company’s internal processes, which allows market participants to judge its prospects.

Important: many (both here and abroad) often confuse the concepts of IPO and going public. Often it really means the same thing, but not always. The fact is that an IPO is not the only way to get into the stock market.

What is the specifics of an IPO and how else can I get on the stock exchange?

One of the key differences between an IPO and other ways to get on the stock exchange is the need to work with underwriters (investment banks and brokers who become the first holders of public shares in order to resell them to their clients during the IPO) even before the placement. Underwriters do not work for free, but for a percentage of the initial placement.

In addition to the IPO, it is also possible to enter the market through Direct Listing and SPAC.

Direct Listing — direct placement of existing shares without issuing new ones. This technique avoids the “dilution” of the shares of current shareholders, as well as the costs of an underwriter who is engaged in “packing” new shares to enter the stock exchange. Direct listing also avoids the lockup period. The fact is that during an IPO, shareholders cannot sell their shares for some time (for example, the founder of a newly listed company cannot get rid of the shares assigned to him at the start of the IPO). In the case of Direct Listing — they can immediately, and not after a period of up to 180 days.

SPAC (Special Purpose Acquisition Company) — entering the stock exchange through a merger with a SPAC already placed on it. Such enterprises are also called specialized companies for targeted mergers or shell companies. The advantage of such placement is that SPAC has already passed all the necessary procedures by the time of unification. In addition, SPAC is managed by experienced managers who can give the acquired company the expertise necessary for business growth. So, the Cypriot mobile publisher Nexters entered the stock exchange through the SPAC of the former head of Megafon Ivan Tavrin. The disadvantage of SPAC is the dilution of the share and high risks: sometimes the shareholders of a company going public may lose control.

Why do they conduct an IPO (enter the market at all)?

The reasons are different, but the goal is the same — money.

Just below are the most common reasons.

• Entering the stock exchange is the most effective channel for raising funds for large companies in need of significant financial injections that cannot be secured by direct investments (for example, the value of the company is so great that it is expensive and risky for a potential investor to “enter” it otherwise).
• The stock market allows a company to grow in value faster. This opens up access to additional resources and growth tools.
• The exchange makes it possible to buy and absorb companies on a non-cash basis. Additional shares issued under the transaction act as a means of payment (for example, Embracer Group likes to do this very much).
• Promising companies with zero or negative profitability receive money for development by entering the stock market (for example, Roblox and Unity, which have recently become public, have negative profitability, which does not prevent them from increasing the value of shares).
• The desire to attract more money for a specific block of shares (IPO gives a higher multiplier of the value of the entire company compared to closed investment rounds, — Kirill Gursky, the leader of the Games & Entertainment direction of the investment company GEM Capital, told me)

Plus, we do not forget about the interests of individuals when a company enters the stock market. For example, investors who invested in a company at an early stage, during an IPO, can “cash out” well (exit the transaction by earning on the difference between the amount they invested in the company at the start and the amount they received for a decently increased share in price). The founders of the company can also do this.

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Today, the gaming market is at the stage of consolidation. Large companies unite, buy smaller ones and increase their value, and interest in the industry is growing.

At the same time, Maria Kochmola, investment director of MGVC, notes that “Now the market conditions are quite favorable for gaming companies to enter the stock exchange. If you look at how the multipliers have changed [to the assessment of gaming companies], then over the past two years they have almost doubled.”

This means that the IPO topic will be relevant for a long time and many more interesting mergers, acquisitions and public auctions are waiting for us.