Things to Consider when Embarking on an IPO
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Iulie 2010 |
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D&B DAVID SI BAIAS S.C.A. - A correspondent law firm of PricewaterhouseCoopers |
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Launching an Initial Public Offering (IPO) and making the transition from a non-publicly traded entity to a listed entity constitutes an important decision that will certainly bring a fresh perspective in the life of any company. Transforming a company into a public entity may represent the foundation on which the inconvenience of the current economic context may be overcome. However, there are also several aspects which one should consider and thoroughly analyze before embarking on such project as IPOs may turn into a waste of time, energy and money if proper factors and essential conditions are not carefully dealt with.
An IPO is the primary public offering of shares initiated by a company aiming to come under the public spotlight by having its shares admitted to trading on a stock exchange market. Besides rising considerable funding from the market, this process will ensure increased transparency of the company's activities which may ultimately be reflected by its growth and provide sustainability of its future prospects. But sourcing the wherewithal to steer clear of any adverse effects generated under the current market climate is not the only reason to go public. The national prestige and the vision of approaching foreign markets may prompt any entrepreneur to elect the IPO path.
If you are contemplating having your company listed and raising finance for its expansion or pure survival, but you have not made your mind yet as to the appropriateness of moving ahead in this direction, you may be interested in a brief description of the most important matters encompassed by an IPO which, in our view, are helpful in successfully going public.
Main advantages
The main rationale for going public is that it opens up financing prospects from persons willing to invest in your company's growth and become shareholders, without implying that you will lose control over your company. As a matter of principle, the new funds raised through a share capital increase are destined to finance the investments, the current and future business needs as well as to balance any losses or deficits incurred during the normal course of activity. Also, the notoriety and consolidated reputation that your company will benefit from after being admitted to trading on a regulated market – especially in relation to your business partners and even with the large public (now seen as potential investors) – represent major advantages. What is also a plus is the negotiability of a publicly traded company's shares as opposed to those issued by an unlisted entity, especially because the value of the shares is objectively set by the market itself.
Pricing
There are two main issues when dealing with the pricing of an IPO: the underpricing and the overpricing. Both evidence the dichotomy between two types of interests: (i) of the company going public, whose intention is to raise as much funds as possible, and (ii) of the prospective investors whose chief expectation is to maximize their investment.
Studies from countries all over the world have shown that IPOs are generally underpriced mostly due to a purposeful conduct of the company (issuer) to boost interest in the publicly offered shares. However, in underpricing an IPO the issuer company may face the risk of attracting less funding than it would have raised by reference to the volume of the offering, particularly because of the over-stimulation of investor interest.
On the Romanian market, the tendency for underpricing in the IPOs (noticed in several offerings) may be counterbalanced by resorting to certain technical arrangements (e.g. the offering programme) whereunder the issuer is allowed to subsequently determine the volume and the price of the shares subject to an IPO.
Conversely, the overpricing of the offering poses the risk for investors not to recover their initial investment when subsequently selling the shares on the secondary market following a fall in the value of shares during the days immediately after the company goes public.
Bought deal. Book building method
Even when you are not willing to take the financial risk posed by a fully-marketed offering, there are certain mechanisms and methods which could still enable your company to raise capital through an IPO. For instance, a bought deal occurs when an underwriter (such as a bank duly authorized to provide brokerage services or, in other countries, an investment bank) undertakes to buy the entire issue from the company (the issuer). In exchange for the underwriter taking the entire risk arising from the IPO, a discounted price per share is offered to the company.
An application of the bought deal is reflected by the book building method often used in IPOs performed on foreign markets. Book building is essentially a process aimed at determining the price of the shares and the demand for such shares on the market. It is a mechanism where underwriters/brokers consult certain institutional investors in order to determine their demand for a certain offering. Further to such consultations, the underwriters will decide whether to engage in underwriting the shares offered through the IPO by reference to the price established during the consultations with the institutional investors.
Exploring investment intentions
The Romanian legislation in force provides for a mechanism allowing the issuers who intend to assess the odds of a future public offering, to request to the National Securities Commission the approval of a preliminary prospectus that would be distributed to a limited number of investors. In such case, the preliminary prospectus is not binding for any investor or for the issuer, its mere purpose being to allow the issuer to simulate a public offering of securities in order to better assess the demand in the market.
The prospectus and its approval by the National Securities Commission
The prospectus of the IPO represents a cardinal instrument designed to inform the public mainly about the business perspectives of the company and therefore it constitutes an essential factor in substantiating the financing decision of the investors. The prospectus is mandatory for any public offering of securities as it ensures compliance with the basic principles of shareholders' information right and the investors' protection. As regards its content, pursuant to Directive 2003/71/EC (on the prospectus to be published when securities are offered to the public or admitted to trading, amending Directive 2001/34/EC), the prospectus should contain all information which, according to the particular nature of the issuer and of the securities offered to the public, is necessary for enabling investors to make an informed and thorough assessment over the assets and liabilities, financial position, profit and losses and prospects of the issuer, over any guarantor as well as the rights attaching to such securities.
