why is it safe to invest in initial public offerings?
Monthly archive: May, 2009
Indian Ipo Market Remains in Hibernation
Joana asks:
Reflecting the trend in the broader markets, the IPO market in India remained more than subdued this week. Almost, like a polar bear hibernating in the winters in the absence of any IPO related news, except investors losing over Rs 5,000 crore in 2008 IPOs. The reasons for this latest IPO news from India are very obvious. The Wall Street mayhem has cast a gloom over all the major global markets, including the IPO markets in India.
The IPO pipeline in India however suggests that everyone has not lost hope yet. Till, 12 September, Adani Power, Alkali Metals Ltd, Apollo Health Street Ltd, D.B.Corp.Ltd, Mandhana Industries Ltd, VRL Logistics Ltd, Future Ventures India and Oil India Ltd are some of the companies that have received SEBI’s approval for coming out with public issues or follow-on public issues. But they have not yet announced the dates. It is understood that they are waiting for the market to show some signs of recovery before they wade into the primary market.
Among the IPO issues in the pipeline in India, Adani Power’s is the biggest with more than Rs 5,000 crore, followed by Future Ventures India’s Rs 2,600 crore issue, Oil India’s issue of Rs 1400 crore and D.B.Corp’s Rs 1,000 crore. Even if some of these big ticket issues are able to successfully mop up the amount, it can be a big boost for the IPO markets in India. The rest of the IPO issues in the pipeline in India are between Rs 100 crore to Rs 500 crore.
But only a brave heart can take the plunge into primary markets, given that investors have burnt more than Rs 5,000 crore in 2008 IPOs so far this year. As on 17 September, of the 42 IPOs that came out in 2008, only seven were trading above their issue price. The gainers include Onmobile Global, Bang Overseas Ltd, Titagarh Wagons, Anu’s Laboratories Ltd, Austral Coke & Projects, Gokul Refoils and Vishal Information. Vishal Information’s IPO stands out with more than 100 per cent year-to-date gains over its issue price despite huge selloff in the past few days in the broader markets. Austral Coke & Projects and Gokul Refoils also deserve some credit with more than 30 per cent returns. All these issues were listed in the past two to three months, probably, pricing their issues more correctly. Among the big ticket IPO issues in India that are waiting for the regulator’s approval are NHPC (Rs 1,680 crore), Bharat Oman Refineries (Rs 2,400 crore), and Godrej Properties (Rs 150 crore). These companies would be hoping that the regulator takes some more time to get the nod.
The rights issues currently open in India also look thin: just three of them. Of course, Sebi’s move of reducing the time period for which they need to stay open will help the companies. The logic of keeping rights issues open for a longer time does not make sense in the current volatility as the price of the stock is subject to wild fluctuations.
Reflecting the trend in the broader markets, the IPO market in India remained more than subdued this week. Almost, like a polar bear hibernating in the winters in the absence of any IPO related news, except investors losing over Rs 5,000 crore in 2008 IPOs. The reasons for this latest IPO news from India are very obvious. The Wall Street mayhem has cast a gloom over all the major global markets, including the IPO markets in India.
The IPO pipeline in India however suggests that everyone has not lost hope yet. Till, 12 September, Adani Power, Alkali Metals Ltd, Apollo Health Street Ltd, D.B.Corp.Ltd, Mandhana Industries Ltd, VRL Logistics Ltd, Future Ventures India and Oil India Ltd are some of the companies that have received SEBI’s approval for coming out with public issues or follow-on public issues. But they have not yet announced the dates. It is understood that they are waiting for the market to show some signs of recovery before they wade into the primary market.
Among the IPO issues in the pipeline in India, Adani Power’s is the biggest with more than Rs 5,000 crore, followed by Future Ventures India’s Rs 2,600 crore issue, Oil India’s issue of Rs 1400 crore and D.B.Corp’s Rs 1,000 crore. Even if some of these big ticket issues are able to successfully mop up the amount, it can be a big boost for the IPO markets in India. The rest of the IPO issues in the pipeline in India are between Rs 100 crore to Rs 500 crore.
But only a brave heart can take the plunge into primary markets, given that investors have burnt more than Rs 5,000 crore in 2008 IPOs so far this year. As on 17 September, of the 42 IPOs that came out in 2008, only seven were trading above their issue price. The gainers include Onmobile Global, Bang Overseas Ltd, Titagarh Wagons, Anu’s Laboratories Ltd, Austral Coke & Projects, Gokul Refoils and Vishal Information. Vishal Information’s IPO stands out with more than 100 per cent year-to-date gains over its issue price despite huge selloff in the past few days in the broader markets. Austral Coke & Projects and Gokul Refoils also deserve some credit with more than 30 per cent returns. All these issues were listed in the past two to three months, probably, pricing their issues more correctly. Among the big ticket IPO issues in India that are waiting for the regulator’s approval are NHPC (Rs 1,680 crore), Bharat Oman Refineries (Rs 2,400 crore), and Godrej Properties (Rs 150 crore). These companies would be hoping that the regulator takes some more time to get the nod.
The rights issues currently open in India also look thin: just three of them. Of course, Sebi’s move of reducing the time period for which they need to stay open will help the companies. The logic of keeping rights issues open for a longer time does not make sense in the current volatility as the price of the stock is subject to wild fluctuations.
Planning Your Business Exit Strategy
Caroline asks:
Does your business have its liquidity event mapped out? Entrepreneurialism can be demanding, and therefore drafting an exit plan is often ignored. If you have raised venture capital then the chances are that your investors will expect you to achieve liquidity at one point in the future.
One tough part of entrepreneurialism is not only working out if you have a good idea, but also establishing if it has the capability to scale, get acquired, or go public. If the answer to any of those questions is “no”, then it’s essential that you establish what your long terms goals are. If you are not able to achieve liquidity, then the performance of your profit and loss account will be the only business metric that matters. It also means that, should you wish to move on in the future, you’ll have to give up your businesses profits with no realizable gains.
One key part of entrepreneurialism is planning your exit strategy. Although your business may change routes along the way, having a solid plan to work from can often pay dividends in saving wasted time, energy and money. If you wanted to start a broadband business, for example, then it would be easy to think of potential companies that might want to buy you at a later stage. And, the market is certainly big enough to go public if you manage to gain a decent percentage of market share.
However, entrepreneurialism isn’t always that simple. Some companies may have a completely new idea taking on a completely new market. In this instance planning your exit can get a little bit trickier. It’s less likely you will have direct competitors who would look to buy your business, and therefore you have to consider the likelihood of achieving liquidity through an alternative route.
Maybe a potential buyer would be able to achieve synergies through selling your product to their customers, or integrating it with their existing technologies? Or maybe if you manage to promote entrepreneurialism within the boardroom, a management buy-out could be an option?
The following are options to consider when planning your exit:
IPO
An IPO or initial public offering is when you make your shares available on the stock market. This is usually the most liquid market for equities, however you will usually require a sizeable market capitalization and stable earnings before this is an advisable option. At this point, there will be a firm price associated with the equity you own in your business.
Acquisition
If your company gets acquired then you may be able to get a much quicker exit than if you hold out for an IPO. If you intend to develop great technology, but do not want to build the infrastructure to unlock its full potential, this can be a great option. Sometimes entrepreneurialism can be about doing what you do best, and then moving on. For some people, that’s starting companies and taking them to a certain stage.
Sell Your Equity
It’s possible for you to sell your equity while allowing pre-existing investors to keep hold of theirs. You may find that pre-existing investors are the best people to approach in this instance. However if the company has potential, a large pool of potential candidates may be interested. The board may also consider a share buy-back.
Does your business have its liquidity event mapped out? Entrepreneurialism can be demanding, and therefore drafting an exit plan is often ignored. If you have raised venture capital then the chances are that your investors will expect you to achieve liquidity at one point in the future.
One tough part of entrepreneurialism is not only working out if you have a good idea, but also establishing if it has the capability to scale, get acquired, or go public. If the answer to any of those questions is “no”, then it’s essential that you establish what your long terms goals are. If you are not able to achieve liquidity, then the performance of your profit and loss account will be the only business metric that matters. It also means that, should you wish to move on in the future, you’ll have to give up your businesses profits with no realizable gains.
One key part of entrepreneurialism is planning your exit strategy. Although your business may change routes along the way, having a solid plan to work from can often pay dividends in saving wasted time, energy and money. If you wanted to start a broadband business, for example, then it would be easy to think of potential companies that might want to buy you at a later stage. And, the market is certainly big enough to go public if you manage to gain a decent percentage of market share.
However, entrepreneurialism isn’t always that simple. Some companies may have a completely new idea taking on a completely new market. In this instance planning your exit can get a little bit trickier. It’s less likely you will have direct competitors who would look to buy your business, and therefore you have to consider the likelihood of achieving liquidity through an alternative route.
Maybe a potential buyer would be able to achieve synergies through selling your product to their customers, or integrating it with their existing technologies? Or maybe if you manage to promote entrepreneurialism within the boardroom, a management buy-out could be an option?
The following are options to consider when planning your exit:
IPO
An IPO or initial public offering is when you make your shares available on the stock market. This is usually the most liquid market for equities, however you will usually require a sizeable market capitalization and stable earnings before this is an advisable option. At this point, there will be a firm price associated with the equity you own in your business.
Acquisition
If your company gets acquired then you may be able to get a much quicker exit than if you hold out for an IPO. If you intend to develop great technology, but do not want to build the infrastructure to unlock its full potential, this can be a great option. Sometimes entrepreneurialism can be about doing what you do best, and then moving on. For some people, that’s starting companies and taking them to a certain stage.
Sell Your Equity
It’s possible for you to sell your equity while allowing pre-existing investors to keep hold of theirs. You may find that pre-existing investors are the best people to approach in this instance. However if the company has potential, a large pool of potential candidates may be interested. The board may also consider a share buy-back.
IPO questions?
Christal asks:
what is the IPO discount and comparable P/E? Suppose 14.0million shares outstanding before the IPO and a 4.0 million share IPO offering by company A. The price of IPO is $10/share. The pre-money should be calcuated as 14 million multiply by $10/share. I am a bit confused of it since 14 million shares should have its own stock prices before IPO and is already outstanding in market. How could this price for the new issue (IPO) could be used for the already outstanding stock to calcuate the pre-money? please give me some help.Thanks a lot
what is the IPO discount and comparable P/E? Suppose 14.0million shares outstanding before the IPO and a 4.0 million share IPO offering by company A. The price of IPO is $10/share. The pre-money should be calcuated as 14 million multiply by $10/share. I am a bit confused of it since 14 million shares should have its own stock prices before IPO and is already outstanding in market. How could this price for the new issue (IPO) could be used for the already outstanding stock to calcuate the pre-money? please give me some help.Thanks a lot
