Going the IPO route
NOT ALL privately held firms stay private. Some of them begin to flirt with, then warm up to the idea of an initial public offering, or IPO, the first sale of company-issued stock to the general public.
Last year, four such firms in the Philippines decided to go public once and for all and made their local bourse debut. Listed in chronological order by debut date, these were Golden Haven Memorial Park, Inc. (raised P778 million), Cemex Holdings Philippines, Inc. ( P25 billion), Pilipinas Shell Petroleum Corp. ( P18.4 billion), and Shakey’s Pizza Asia Ventures, Inc. ( P4 billion).
“Listing a company will bring in more work and more things to manage, but will also open up many advantages in the long run such as being able to tap the capital markets to fuel the company’s expansion, and being listed also provides the opportunity to thousands of other people to become part owners of the company,” said Edgar “Injap” Sia II, chairman and chief executive officer of DoubleDragon Properties Corp., which went the IPO route in 2014.
Private companies are not short of options when it comes raising capital. Investopedia, an online resource of financial content, said they can do so by borrowing, finding additional private investors or being acquired by another company.
“But, by far, the IPO option raises the largest sums of money for the company and its early investors,” the site said.
There are other financial benefits to reap from going public. Publicly traded companies usually enjoy lower interest rates when they issue debt, Investopedia noted, because they draw more scrutiny from analysts and investors.
Given that the market demand is there, they can issue more stock in a secondary offering. “Thus, mergers and acquisitions are easier to arrange because stock can be issued as part of the deal,” the site said.
It’s relatively easier to attract and retain top talent, thanks to the implementation of benefits like employee stock ownership plans, which is made possible by public markets and liquidity.
But not everything about being publicly traded is painless. “There are disclosure requirements, earnings expectations from shareholders and analysts, and a variety of compliance and legal requirements,” said John David D. Sison, investor relations officer and vice-president and head of corporate planning of Philippine Business Bank, which was listed in 2013.
“Strict corporate governance and transparency standards must be met, and these standards assist a public company’s maturation and growth processes,” he added.
To help a firm decide whether to go public or not, Mr. Sison recommended considering the company’s vision, corporate culture and business model and plans.
Meanwhile, Mr. Sia suggested that firms examine their capacity to grow consistently, even for as long as 50 years. “I have always been a strong believer in embarking only on ventures that have the capacity to last for generations,” he said.
It is also important to ensure that there is a well thought- out and agreedupon investor relations policy, according to Mr. Sison. “Balancing transparency and protecting trade secrets is no simple task,” he said.
A company will have to enlist the services of an investment bank, the entity that performs underwriting, the process by which investment capital from investors is raised on behalf of corporations and governments that are issuing either equity or debt securities, Investopedia said.
Soon, the bank and the firm will reach a point where they have to determine at which price the shares will be sold. “This is the price at which the company will raise capital for itself, since after that initial sale, its stock will trade on the secondary market and the proceeds of share sales will go directly to whoever owned those shares and not to the company,” Investopedia said.
Mr. Sison warned against giving excessive attention to the price. “Focusing too much on the stock price may distract the management from delivering profitability, which in the long run determines a company’s stock price,” he said.
IPO, Investopedia noted, is long and complicated. Once the dust has settled, Mr. Sia said the freshly listed company should continue to pursue its goals with more vigor. “Because once the company is able to attain its set goals on time or ahead of time, it will build up the company’s credibility to deliver,” he said.