When a private company begins to sell its shares to the general members of the public or institutional investors for the first time, it is known as an Initial Public Offering. In most instances, about 20-30 percent of shares of a company which go public are set free in the stock market (Waldon, 2012). One of the dominant reasons for any IPO is to seek surplus capital for growth and expansion. This was the case with Wal-Mart retail store when it opted to go public. Before the Wal-Mart’s IPO, additional expansion funds were sought from local banks. However, these were not enough to execute growth plans (Friesen & Swift, 2009).
During the Wal-Mart’s IPO, investment banks bought the securities that had been put afloat by the company as part of their role in underwriting. They also sold the shares to the target market on behalf of the issuer (Wal-Mart). In other words, the offering risk is usually taken care of by the investment banks during the underwriting process (Gregoriou, 2011). Other investment banks that assist in the underwriting process are known as the originating house. They are sought investment banks to assist in the IPO process. Hence, an underwriting syndicate is formed from this type of arrangement. Members of the syndicate determine the number of shares to be received by each stakeholder as well as the pricing plan. Eventually, a binding agreement is signed.
References
Friesen, G.C. & Swift, C. (2009). Overreaction in the thrift IPO aftermarket. Journal of Banking & Finance, 33 (7), 1285–1298.
Gregoriou, G.N. (2011). Initial Public Offerings (IPO): An International Perspective of IPOs. Oxford: Elsevier Inc.
Waldon, G. (2012). Wal-Mart IPO Set the Stage for Global Expansion. Web.