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Abstract:
The purpose of this paper is to highlight Initial Public Offering related
issues.
When a company sells stock to the public for the first time it is called
an initial public offering. Once a company becomes public it has to
disclose so much information to public on regular intervals.
Implementation of any key decision takes time; the cost of the process
is very high and so many other issues. Then Initial Public Offering of
HBL is also discussed in this paper. It is concluded that a company
should consider the advantages and disadvantages of IPO before
deciding to go public. IPO related issues can be minimized by better
planning.
Introduction:
IPO stands for Initial Public Offering. As the name suggests it’s the
process wherein a company goes to public for the first time for raising
money by offering ownership in the company. In this process a private
limited company becomes Public Limited Company. Companies offering
an IPO are sometimes new, young companies, or sometimes
companies which have been around for many years but are finally
deciding to go public. IPO’s are often used as a way for a young
company to gain necessary market capital. When a company decides
to go public, it first hires an underwriter, usually a large investment
bank. The underwriter agrees to buy all shares of the company’s stock
minus the investment's firm commission, usually about 5 to 7 percent.
After a successful offering, the underwriter meets with all parties to
distribute the funds and settle all expenses. At that time the transfer
agent is given authorization to forward the securities to the new
owners. An IPO closes with the transfer of the stock, but the terms of
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IPO Related Issues
the offering are not yet completed. The Security and Exchange
commission of Pakistan (SECP) requires the filing of a number of
reports pertaining to the appropriate use of the funds as described in
the prospectus.
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IPO Related Issues
Common Shares
When we buy common shares we become a part owner of the
company. We will share in the profits of the company if it does well,
either by seeing the value of your shares rise, by being paid dividends
out of the firm's profit, or both. If the business performs badly, you
probably won't get any dividends and the value of your shares will
drop.
Preferred shares:
A preferred share is a special type of stock that regularly pays you a
set amount of money out of the company's profits called dividends.
They're called preferred because you get preferential claim to the
profits ahead of common shareholders.
Why Do Companies Go Public?
The primary purpose for companies to be publicly listed at the
exchange is to cost-effectively raise capital. It reduces the company’s
reliance on the traditional financiers such as financial institutions and
individuals. The most common reason is that capital raised through an
IPO does not have to be repaid, whereas debt securities such as bonds
must be repaid with interest. Listing allows business expansion without
increasing borrowings or draining the company’s cash reserves. History
of listed companies indicate that companies that convert to public
ownership are more likely to become successful than control
companies that remain private. Companies that go public are also
more likely to become acquirers than control companies. IPO
companies grow faster than control companies after going public.
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IPO Related Issues
IPO Process:
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IPO Related Issues
Issue Price:
A company that is planning an IPO appoints lead managers to help it
decide on an appropriate price at which the shares should be issued.
There are two ways in which the price of an IPO can be determined:
either the company, with the help of its lead managers, fixes a price or
the price is arrived at through the process of book building.
General Issues Before Going IPO:
Issues before going IPO are:
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IPO Related Issues
Financial Position:
Over and above the timing issue, however, a company must prepare
itself internally to be ready to go public. Usually, a history of strong
earnings is required to make a company attractive to investors but
other factors such as management expertise, innovative new products
and a new business concept can allow a company to go public even
with little or no earnings. The key to any company's ability to
undertake an IPO is a strong, capable and experienced management
team and a prominent Board of Directors.
Growth Potential:
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IPO Related Issues
Not all IPO’s are for more than 50 per cent of the issuer’s voting
shares, in fact, the average is around 30 per cent. So although control
is not lost through the IPO, if the company requires further equity to
fuel its growth, existing shareholders will suffer dilution. For the
majority of companies, control will pass to public shareholders at some
point in time. If a large portion of the company's shares are sold to the
public, the company may become a target for a takeover, causing
insiders to lose control. A takeover bid may be the result of
shareholders being upset with management or corporate raiders
looking for an opportunity.
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IPO Related Issues
Costs Of IPO’s:
However, the direct costs of an IPO can pale beside the indirect cost of
under pricing. Because no cash is coming directly out of the issuer’s
pocket, under pricing can sometimes be ignored as a cost. It should not
be. IPO’s around the world are under priced compared with their short-
term performance. On average, an IPO will close at a price that is 15 to
20 per cent above its issue price, although this varies by market and
industry and over time. This means that selling shareholders and the
company are leaving significant sums of money on the table when they
go public.
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IPO Related Issues
HBL at a Glance:
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IPO Related Issues
The HBL IPO is the largest offering ever in Pakistan in terms of both
value and number of successful applicants. Road show Presentations
for the Offer for the Sale of Shares of Habib Bank Limited (“HBL”) were
held in Karachi on July 23, 2007 and in Lahore on July 24, 2007. The
Offer for Sale was conducted by the Privatization Commission,
Government of Pakistan out of State Bank of Pakistan’s shareholding in
HBL.
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IPO Related Issues
The prospectus:
The most important and time-consuming task facing the HBL IPO team
is the development of the prospectus, a business document that
basically serves as a brochure for the company. The prospectus
includes all financial data for a company for the past five years,
information on the management team, and a description of a
company's target market, competitors, and growth strategy. There is a
lot of important information in the prospectus, and the underwriting
team must make sure it is accurate.
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IPO Related Issues
Every year hence, there are audit fees, legal fees, quarterly reports,
proxy reports, miscellaneous filings, annual reports, transfer agent
fees, public relations, investor relations, and a whole host of other
expenses relating to being a public company. HBL is bearing all these
expenses.
Market Pressure:
Restrictions on management:
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IPO Related Issues
SWOT Analysis:
SWOT Analysis is a strategic planning method used to evaluate the
Strengths, Weaknesses, Opportunities, and Threats involved in a
project or in a business venture.
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IPO Related Issues
Conclusion:
There are many advantages for a company going public like the
financial benefit in the form of raising capital is the most distinct
advantage. Some disadvantages are that the costs of floatation can
be substantial; one will have to consider shareholders interests
when running the company - which may differ from his/her own
objectives. Increased disclosure of information is also a big issue.
Going public may require organizational structure change--e.g.,
from a partnership to a corporation. Before initiating a public
offering, a company should consider how the company's existence
will change if it is public.
Recommendations:
In the light of above conclusion I will give some suggestions for the
better function of Bank. Management should provide better
arrangement for the employees. Information technology should be
introduced in all branches of HBL to enhance the efficiency. Aggressive
publicity campaign must be introduced through press and electronic
media for new products and schemes by initiating vigorous marketing
policy. Online banking should be introduced in all the branches.
References:
1) http://www.investopedia.com/terms/i/ipo.asp
2) http://www.privatisation.gov.pk/finance/hbl/HBL%20IPO
%20Offering%20Documents.htm
3) http://www.dawn.com/2007/06/30/ebr2.htm
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IPO Related Issues
4) http://www.gopublictoday.com/goingpublic/goingpublic-
disadvantages.php
5) http://lastbull.com/advantages-and-disadvantages-of-ipo-public-
limited-companies/