Chasing the IPO dream

Choppy waters ahead in the Philippine economy? Unfazed by the substantial first quarter slowdown of gross domestic product growth to 5.2% (a three-year low on a year-to-year basis), a number of big private companies have remained confident and upbeat with their respective plans to do an initial public offering (IPO), hopefully this year.

The equity capital expected to be raised this year in the local stock market is around P200 billion. On that score, we take note that the Philippine Stock Exchange is playing its role to the hilt. It’s pushing to add more companies to be listed in the stock exchange either by way of an IPO, backdoor listing, or listing by way of introduction. Among those companies reported to be planning to become publicly listed firms are Goldilocks Bakeshop; LBC Express; Philstocks Financial; Green Power Panay Phil.; SBC Phil Corp.; Gweilo Corp.; and Profriends Group.

First Metro Investment Corp. President Jojo Dispo has likewise disclosed that the country’s number one investment bank is putting the final touches on the application of two companies to do an IPO — one is an established, big construction company, while the other is strong in the consumer business. The planned initial equity sale of both companies will be worth up to P30 billion.

Selling shares to the public highlights key benefits like enhanced corporate image, broader equity base, stronger financial condition (improved balance sheets, better cash flows, financial discipline), and, with guarded hope, reduced borrowing cost. There’s also that potential price appreciation once the shares acquire strong liquidity including bank’s acceptability as loan collateral. When a company goes public, it will also start appearing on the radar screens of potential acquirers for possible merger or acquisition and, heaven knows, monetary windfall to existing shareholders.

Assuming that you, as the founder/ owner, have decided to do an IPO, here are the basics. Assess realistically the debt-carrying capacity of your company. Review the impact of the planned IPO on the possible share dilution of existing shareholders. Review your business and growth prospects. Review the historical financial performance of the company relating to profitability, revenue, leverage and asset base. Are they sustainable? What’s your standing within your industry? What’s the integrity, quality and expertise of your senior management team including your board directors? What’s the pricing/valuation model to be used that will be acceptable to both issuer and investors? What’s the issue size (normally it’s 20% to 25% of the outstanding shares)?

You must also anticipate that potential investors will raise questions on this subject over and over again. What are you going to do with the funds you’ll generate in your IPO? The success of an IPO depends largely on the coherence and credibility of your IPO story. Review your company’s operating and expansion plans and determine the new financial requirements. One major reason why some companies fail to raise as much needed equity capital is traced to their failure to convince investors there’s “gold in the mine” in their IPO stories.

Assess realistically the debtcarrying capacity of your company. Review the impact of the planned IPO on the possible share dilution of existing shareholders. Review your business and growth prospects.