IPO’s vs. APO’s
IPO: Initial Public Offering, or the Offering.
In 1602, the Dutch East India Company was the first company to issue stocks and bonds in the world in an initial public offering.
Reasons for listing When a company lists its securities on a public exchange, the money paid by investors for the newly- issued shares goes directly to the company (in contrast to a later trade of shares on the exchange, where the money passes between investors). An IPO, therefore, allows a company to tap a wide pool of investors to provide it with capital for future growth, repayment of debt or working capital. A company selling common shares is never required to repay the capital to investors. Once a company is listed, it is able to issue additional common shares via a secondary offering, thereby again providing itself with capital for expansion without incurring any debt. This ability to quickly raise large amounts of capital from the market is a key reason many companies seek to go public.
There are several benefits to being a public company, namely:
• Bolstering and diversifying equity base
• Enabling cheaper access to capital
• Exposure, prestige and public image
• Attracting and retaining better management and employees through liquid equity participation
• Facilitating acquisitions
• Creating multiple financing opportunities: equity, convertible debt, cheaper bank loans, etc.
• Increased liquidity for equity holder
Disadvantages of an IPO
There are several disadvantages to completing an initial public offering, namely:
• Significant legal, accounting and marketing costs
• Ongoing requirement to disclose financial and business information
• Meaningful time, effort and attention required of senior management
• Risk that required funding will not be raised
• Public dissemination of information which may be useful to competitors, suppliers and customers
Procedure
IPOs generally involve one or more investment banks known as "underwriters". The company offering its shares, called the "issuer", enters a contract with a lead underwriter to sell its shares to the public. The underwriter then approaches investors with offers to sell these shares.
The sale (allocation and pricing) of shares in an IPO may take several forms. Common methods include:
• Best efforts contract
• Firm commitment contract
• All-or-none contract
• Bought deal
• Dutch auction
A large IPO is usually underwritten by a "syndicate" of investment banks led by one or more major investment banks (lead underwriter). Upon selling the shares, the underwriters keep a commission based on a percentage of the value of the shares sold (called the gross spread). Usually, the lead underwriters, i.e. the underwriters selling the largest proportions of the IPO, take the highest commissions—up to 8% in some cases.
Multinational IPOs may have many syndicates to deal with differing legal requirements in both the issuer's domestic market and other regions. For example, an issuer based in the E.U. may be represented by the main selling syndicate in its domestic market, Europe, in addition to separate syndicates or selling groups for US/Canada and for Asia. Usually, the lead underwriter in the main selling group is also the lead bank in the other selling groups.
Because of the wide array of legal requirements and because it is an expensive process, IPOs typically involve one or more law firms with major practices in securities law, such as the Magic Circle firms of London and the white shoe firms of New York City.
Public offerings are sold to both institutional investors and retail clients of underwriters. A licensed securities salesperson ( Registered Representative in the USA and Canada ) selling shares of a public offering to his clients is paid a commission from their dealer rather than their client. In cases where the salesperson is the client's advisor it is notable that the financial incentives of the advisor and client are not aligned.
In the US sales can only be made through a final Prospectus cleared by the Securities and Exchange Commission.
Investment Dealers will often initiate research coverage on companies so their Corporate Finance departments and retail divisions can attract and market new issues.
The issuer usually allows the underwriters an option to increase the size of the offering by up to 15% under certain circumstance known as the greenshoe or overallotment option.
Perception of IPOs can be controversial. For those who view a successful IPO to be one that raises as much money as possible, the IPO was a total failure. For those who view a successful IPO from the kind of investors that eventually gained from the underpricing, the IPO was a complete success. It's important to note that different sets of investors bid in auctions versus the open market—more institutions bid, fewer private individuals bid. Google may be a special case, however, as many individual investors bought the stock based on long-term valuation shortly after it launched its IPO, driving it beyond institutional valuation.
Pricing
The underpricing of initial public offerings (IPO) has been well documented in different markets (Ibbotson, 1975; Ritter 1984; Levis, 1990; McGuinness, 1992; Drucker and Puri, 2007). While issuers always try to maximize their issue proceeds, the underpricing of IPOs has constituted a serious anomaly in the literature of financial economics. Many financial economists have developed different models to explain the underpricing of IPOs. Some of the models explained it as a consequences of deliberate underpricing by issuers or their agents. In general, smaller issues are observed to be underpriced more than large issues (Ritter, 1984, Ritter, 1991, Levis, 1990)
Historically, some of IPOs both globally and in the United States have been underpriced. The effect of "initial underpricing" an IPO is to generate additional interest in the stock when it first becomes publicly traded. Through flipping, this can lead to significant gains for investors who have been allocated shares of the IPO at the offering price. However, underpricing an IPO results in "money left on the table"—lost capital that could have been raised for the company had the stock been offered at a higher price. One great example of all these factors at play was seen with theglobe.com IPO which helped fuel the IPO mania of the late 90's internet era. Underwritten by Bear Stearns on November 13, 1998, the stock had been priced at $9 per share, and famously jumped 1000% at the opening of trading all the way up to $97, before deflating and closing at $63 after large sell offs from institutions flipping the stock. Although the company did raise about $30 million from the offering it is estimated that with the level of demand for the offering and the volume of trading that took place the company might have left upwards of $200 million on the table.
The danger of overpricing is also an important consideration. If a stock is offered to the public at a higher price than the market will pay, the underwriters may have trouble meeting their commitments to sell shares. Even if they sell all of the issued shares, if the stock falls in value on the first day of trading, it may lose its marketability and hence even more of its value.
Underwriters, therefore, take many factors into consideration when pricing an IPO, and attempt to reach an offering price that is low enough to stimulate interest in the stock, but high enough to raise an adequate amount of capital for the company. The process of determining an optimal price usually involves the underwriters ("syndicate") arranging share purchase commitments from leading institutional investors. On the other hand, some researchers (e.g. Geoffrey C., and C. Swift, 2009) believe that IPOs are not being under-priced deliberately by issuers and/or underwriters, but the price-rocketing phenomena on issuance days are due to investors' over-reaction. Some algorithms to determine underpricing: IPO Underpricing Algorithms
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.
Note: Not all IPOs are eligible for delivery settlement through the DTC system, which would then either require the physical delivery of the stock certificates to the clearing agent bank's custodian, or a delivery versus payment (DVP) arrangement with the selling group brokerage firm.
Quiet period
There are two time windows commonly referred to as "quiet periods" during an IPO's history. The first and the one linked above is the period of time following the filing of the company's S-1 but before SEC staff declare the registration statement effective. During this time, issuers, company insiders, analysts, and other parties are legally restricted in their ability to discuss or promote the upcoming IPO.
The other "quiet period" refers to a period of 40 calendar days following an IPO's first day of public trading. During this time, insiders and any underwriters involved in the IPO are restricted from issuing any earnings forecasts or research reports for the company. Regulatory changes enacted by the SEC as part of the Global Settlement enlarged the "quiet period" from 25 days to 40 days on July 9, 2002. When the quiet period is over, generally the underwriters will initiate research coverage on the firm. Additionally, the NASD and NYSE have approved a rule mandating a 10-day quiet period after a econdary Offering and a 15-day quiet period both before and after expiration of a "lock-up agreement" for a securities offering.
Stag profit
Stag profit is a stock market term used to describe a situation before and immediately after a company's Initial public offering (or any new issue of shares). A stag is a party or individual who subscribes to the new issue expecting the price of the stock to rise immediately upon the start of trading. Thus, stag profit is the financial gain accumulated by the party or individual resulting from the value of the shares rising.
For example, one might expect a certain I.T. company to do particularly well and purchase a large volume of their stock or shares before flotation on the stock market. Once the price of the shares has risen to a satisfactory level the person will choose to sell their shares and make a stag profit.
Largest IPOs
• Petrobras $70B in 2010
• General Motors $23.1B in 2010
• Agricultural Bank of China $22.1B in 2010
• Industrial and Commercial Bank of China $21.9B in 2006
• American International Assurance $20.5B in 2010
• NTT DoCoMo $18.4B in 1998
• Visa Inc. $17.9B in 2008
• AT&T Wireless $10.6B in 2000
• Rosneft $10.4B in 2006
• Santander Brazil $8.9B in 2009
APO Alternative Public Offering
An Alternative Public Offering is the acquisition of a public company by a private company so that the private company can bypass the lengthy and complex process of going public. The transaction typically requires reorganization of capitalization of the acquiring company.
Process
In an APO (reverse takeover), shareholders of the private company purchase control of the public shell company and then merge it with the private company. The publicly traded corporation is called a "shell" since all that exists of the original company is its organizational structure. The private company shareholders receive a substantial majority of the shares of the public company and control of its board of directors. The transaction can be accomplished within weeks. If the shell is an SEC-registered company, the private company does not go through an expensive and time-consuming review with state and federal regulators because this process was completed beforehand with the public company. However, a comprehensive disclosure document containing audited financial statements and significant legal disclosures is required by the Securities Exchange Commission for reporting issuers. The disclosure is filed on Form 8-K and is filed immediately upon completion of the reverse merger transaction.
The transaction involves the private and shell company exchanging information on each other, negotiating the merger terms, and signing a share exchange agreement. At the closing, the shell company issues a substantial majority of its shares and board control to the shareholders of the private company. The private company's shareholders pay for the shell company by contributing their shares in the private company to the shell company that they now control. This share exchange and change of control completes the reverse takeover, transforming the formerly privately held company into a publicly held company.
Benefits
The advantages of public trading status include the possibility of commanding a higher price for a later offering of the company's securities. Going public through a reverse takeover allows a privately held company to become publicly held at a lesser cost, and with less stock dilution than through an initial public offering (IPO). While the process of going public and raising capital is combined in an IPO, in a reverse takeover, these two functions are separate. A company can go public without raising additional capital. Separating these two functions greatly simplifies the process.
In addition, a reverse takeover is less susceptible to market conditions. Conventional IPOs are risky for companies to undertake because the deal relies on market conditions, over which senior management has little control. If the market is off, the underwriter may pull the offering. The market also does not need to plunge wholesale. If a company in registration participates in an industry that's making unfavorable headlines, investors may shy away from the deal. In a reverse takeover, since the deal rests solely between those controlling the public and private companies, market conditions have little bearing on the situation.
The process for a conventional IPO can last for a year or more. When a company transitions from an entrepreneurial venture to a public company fit for outside ownership, how time is spent by strategic managers can be beneficial or detrimental. Time spent in meetings and drafting sessions related to an IPO can have a disastrous effect on the growth upon which the offering is predicated, and may even nullify it. In addition, during the many months it takes to put an IPO together, market conditions can deteriorate, making the completion of an IPO unfavorable. By contrast, a reverse takeover can be completed in as little as thirty days.
Future financing
The greater number of financing options available to publicly held companies is a primary reason to undergo an APO (reverse takeover). These financing options include:
• The issuance of additional stock in a secondary offering
• An exercise of warrants, where stockholders have the right to purchase additional shares in a company at predetermined prices. When many shareholders with warrants exercise their option to purchase additional shares, the company receives an infusion of capital.
• Other investors are more likely to invest in a company via a private offering of stock when a mechanism to sell their stock is in place should the company be successful.
In addition, the now-publicly held company obtains the benefits of public trading of its securities:
• Increased liquidity of company stock
• Higher company valuation due to a higher share price
• Greater access to capital markets
• Ability to acquire other companies through stock transactions
• Ability to use stock incentive plans to attract and retain employees
Examples
In all of these cases shareholders acquire controlled the resulting entity.
• The corporate shell of REO Motor Car Company, in what amounted to a reverse "hostile" takeover, was forced by dissident shareholders to acquire a small publicly traded company, Nuclear Consultants. Eventually this company became the modern-day Nucor.
• ValuJet Airlines was acquired by AirWays Corp. to form AirTran Holdings, with the goal of shedding the tarnished reputation of the former.
• Aérospatiale was acquired by Matra to form Aérospatiale-Matra, with the goal of taking the former, a state-owned company, public.
• The game company Atari was acquired by JT Storage, as marriage of convenience.[1]
• US Airways was acquired by America West Airlines, with the goal of removing the former from Chapter 11 bankruptcy.
• The New York Stock Exchange was acquired by Archipelago Holdings to form NYSE Group, with the goal of taking the former, a mutual company, public.
• ABC Radio was acquired by Citadel Broadcasting Corporation, with the goal of spinning the former off from its parent, Disney.
• Frederick's of Hollywood parent FOH Holdings was acquired by apparel maker Movie Star in order to take the larger lingerie maker public.
• Eddie Stobart in a reverse takeover with Westbury Property Fund allowing transport by ship, road, rail or boat to and within the UK, using only one company.
• Clearwire acquired Sprint's Xohm division, taking the former company's name and with Sprint holding a controlling stake, leaving the resulting company publicly traded
Advantages of APO over IPO
? Lower costs
? Quicker process
? No IPO window necessary
? Less management attention required
? No risk of underwriter withdrawal
? Less dilution
? No underwriter
The Charms Investments Approach to an APO:
1. Consultation
• From the moment we are engaged we work to determine what you are looking to accomplish. We have the experience to understand that taking a corporation public is a major undertaking not to be taken lightly. It is important to understand you vision and needs in the short and long term. We work with our clients to determine exactly what they are looking for in a public company, determine short term and long term capital needs, and finally exit strategies.
2. Evaluation
• Based upon your consultation we carefully evaluate your company, your public company needs, growth plan, capital requirements, budget, and solutions that are right for you.
3. Selection
• Our Inventory: Selection is important, no one wants to be put into something that does not deliver what they want to accomplish and while market fluxions do occur, and our staff meticulously selects our inventory of Public Companies. Some companies can start on a lower exchange and milestone themselves on to the larger markets, while some need to be on the larger markets immediately to accomplish the expansion or capital needs. We keep an inventory of OTC public, and OTC BB companies to suit our client’s diverse needs, and we have access to Companies on all exchanges big and small on the global market to achieve your specific needs.
4. Financing Options
• Each company is different, each budget is different, and we have the right public company to fit your budget and your needs. We can assist in financing for some clients or execute cash and carry deals. We work with our clients to get them exactly what they need to accomplish their goals and objectives.
5. Building your Business Plan and Public Prospectus
• This is an important part of going public, just as your business has grown over the years or will grow over the years, your public company will grow in number of investors, volume of shares traded, and price per share. It is important to understand where you are in this growth and where you can expect to be in the coming months/ years.
6. Determining the amount work needed.
• We determine the amount of work needed to get your company public and accomplishing the capital requirements needed to achieve your objectives.
7. Assembling the team
• Legal
• Investor Relations
• Project Management
• Market Makers
• Investment Bankers
8. Executing your Public Offering
• Charms investments LTD has executed over 100 public offerings through APO or IPO on several exchanges worldwide. When it is your time to enter the public arena we will make sure this is your time to shine. Your Public Offering will be a lucrative celebration of accomplishment that will be executed with all of the precision and accuracy you would expect to reflect your company’s hard work.
9. Operating and Maintaining the Public Company
• Charms Investments LTD will assign a project manager to you who will lay out a master plan, time line, and public prospectus that will assist you in day to day operations of your public corporation. This living and evolving master plan will adapt to market conditions applying the right amount of Investor Relation, On time filings, and legal work that will facilitate your capital raises according to expectation.
10. Educating and passing the Torch
• Charms Investments LTD will educate officers on requirements in the public market, and assist management in overcoming the learning curve to insure success over the coming months/ years with the public corporation to insure success.
Charms Investments works with both private and institution investors globally to achieve our client’s needs and consistently meet or exceed corporate expectations. With over 100 years of experience our senior staff assists public companies of any level with:
• Corporate Communication: Charms Investments has a substantial contact list of Investment Relation/Public Relation promotional groups and firms to raise attention in North America for foreign companies as well as provide solutions to Unites States and Europe based corporations looking to gain market share.
• Market Presences: Along with IR/PR promotion, Charms Investments can assist with market/business development in Asia, the United States and Europe. We work with a premiere group of global affiliates in various industries to fulfill your company's needs.
• Market Support for Foreign Listings: For expansion and presence in foreign markets, our company gives special attention to investment marketing, advertising, and creativity towards further business development.
Charms Investments
• Strong Investor Relations Division based on Wall Street
• Long productive relationships with Market Makers around the world
• Long standing productive relationships with Investment Bankers
• SEC Attorneys on Staff dedicated to our clients
• Global Experience
• Global Presence
• International Offices
• Award winning staff with over 100 years of experience
