Overview

Going Public

Initial public offerings (IPOs) is first-time share offering to third-party investors (retail and institutional investors). IPOs is also one of the liquidity sources for a company to grow and expand operations. There are many possible reasons for a company to go public, but the primary two always goes down to selling down the business stakes and raising additional equity capital. However, in going public, there are requirements for a company to adhere, including opening up the company's affairs to the public for transparency of information. Investors buy IPOs because they think of IPOs as money-making opportunities, considering IPOs as an investment with the possibility of getting a lucrative return from a sizeable position in stock - probably something that might be more costly if investors want to practice in the secondary market.

How is IPO different to SEO?

The term "primary equity market" is usually used to define the new equity issue market (i.e., IPO), whether it is new (public issue) or old shares (offer for sale) offerings. Often in an IPO, both are combined where (1) a company issues new shares for the public to subscribe for new funds to be raised in a company and (2) allows the existing shareholder to choose to reduce their shareholdings during the listing. In contrast, shares trading for an already-listed company defines the secondary market (i.e., secondary equity offering - SEO).

Parties involved in an IPO

The Company

In other words, it is the issuer. In the company, commonly, there will be a dedicated team to be involved with the IPO process, which the size of the team should vary from one company to another. This includes important individuals at the top level (CEO and CFO) to ensure continuity and provide a principal point for enquiries from all parties throughout the IPO process.

Investment Bank

Underwriters

Also known as the underwriters, manage the IPO process. The investment bank is an organization consisting of various divisions and teams involved in an IPO at various stages. This includes discussing confidential information with the corporate or institutional clients, exclusively focusing on market activities to achieve the best value, risk control and credit, and handling legal and compliances for their corporate clients (the company).

Market Regulators

Securities Commission in Malaysia (SCM)

SCM has a direct responsibility in regulating the capital market in Malaysia and ensuring the development and growth of the market is sustainable. SCM regulates all persons and entities licensed under the Capital Markets and Services Act 2007. In an IPO, the SCM functions as to approving, registering and regulating all matters relating to the new issuance.

Bursa Malaysia

Bursa Malaysia is one of the largest bourses in ASEAN. Bursa Malaysia is an exchange holding company assisting over 900 companies in Malaysia to raise capital through several markets - Main Market, ACE Market and LEAP Market. In an IPO process, any company that has the approval of SCM to be publicly listed will be listed in either three of the markets depending on whether the company is a large-cap company, emerging company or a promising SME company,

Investors

Strategic Investors

Also known as the insiders. Strategic investors are investors that participate in the issuance at the early stage, during the execution process. Strategic investors include private-equity investors and investment banks. They are subject to a lock-up, in which selling their shares are forbidden for a specified period, depending on the IPO contract. The benefit of strategic investors is that their investments are made at a significant discount, relying on the company's valuation.

Retail Investors

Individuals with having less than 5% shareholdings and are not related as directors of the company. They often bid for shares worth lesser with a lower amount than strategic investors due to their low purchasing power. Unlike the strategic investors, retail investors commit to bidding at a price, as do other investors at a later stage, without any benefit of a discount.

More about IPO

Reasons for going public

To raise additional capital by selling shares to the public. The proceeds may be used to expand the business growth for firms working capital and finance loan repayment.
To provide the company with a considerable amount of publicity from the prestige and recognition attached to the status of a publicly listed company.
To gain the standing that often comes with a publicly listed company. It may help the company to secure better terms from lenders.
To shift focus on the company's core activities and de-merge a division in a newly listed company.

Advantages and Disadvantages of going public

Advantages

Increased capital. IPO can provide the company with additional funds to increase the cash flow stream in meeting the company's goals.
Improved financial position. An immediate improvement to the company's balance sheet, especially the debt-to-equity ratio.
Increased visibility and credibility. Ongoing exposure to media coverage in the financial markets can enhance the company's reputation.
Less dilution. Allowance to command higher prices of securities through IPO rather than through private placement. In other words, "giving up less of the company to receive the same amount of funds".
Enhanced liquidity. Providing liquidity to the market, management, and existing shareholders through the trading of shares.
Market valuation. Increased liquidity and available information enable the market to ascertain a higher value for the public company than for the private one.
Exit strategy. For certain existing shareholders with the intention to liquidate their shares, going public allows them to do so through the exercise of "offer for sale".

Disadvantages

Loss of confidentiality and increased financial transparency. According to the listing requirements, once a company goes public, confidential information (financial and non-financial) is open to public scrutiny.
Management demands. Constant needing the top management to be available for the shareholders, brokers and analysts for information verification. There can also be considerable pressures (internal and external) on the company in maintaining the growth rate.
On-going reporting requirements. It goes accordingly with the listing requirements that the company should report its operating results quarterly to the SCM. Failing to do so will put the company in a dangerous position, such as triggering the criteria of PN17 for the Main Market company.
Lesser control and increased board of directors (BOD) influence. Existing shareholders that choose to dilute their ownership will reduce their level of control over the company.
Greater legal exposure. Greater legal exposure is attached to the officers and directors of the company. For instance, directors have a fiduciary duty to the company, and officers must ensure the reporting is not violating any law or regulations as a publicly listed company.

Jargons in Investment

IPO balloting. Investors apply for a number of shares they wish to subscribe for by paying the total sum on the application. If the issue (IPO) is oversubscribed, balloting (voting) will be done to allocate the shares.
IPO proceeds. All proceeds received from the sale in the IPO. In Malaysia, each firm must specifically disclose information on their intended use of proceeds, which are the growth opportunities, debt repayment, and working capital,
Issue price. The price at which shares of common stock will be sold to investors before an IPO firm begins trading on public exchanges. Commonly referred to as the offering price.
Lock-up. The disposal of new shares by the existing owners (promoters) of the company.
Lot size. The smallest number of shares can be bid for in an IPO. If investors want to bid for more shares, they must bid in multiples of the lot size. When investing in stocks in Malaysia, a minimum of 1 lot is required. 1 lot is equivalent to 100 shares.
Offer for sale. Issue of existing securities held by the existing shareholders of the firm to the public.
Price band. The price range in which investors can bid for IPO shares, set by the firm and the underwriter.
Private placement. Sale of securities directly to a private investor rather than as part of a public offering.
Prospectus. A document created by the IPO firm that discloses information about its business, strategy, historical financial statements, recent financial results, and management.
Public Issue. New issuance of securities made for new investors.
Underwriter. The investment bank manages the offering for the issuing firm. The underwriter generally determines the issue price, publicizes the IPO, and assigns shares to investors.

A Journey of Privately Owned Companies to Initial Public Offerings

What is it and How is an IPO underwritten?

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