The risks of buying into IPOs
Personal Investing - By Ooi Kok Hwa
Investors may not necessarily make quick gains from share offerings
AS our economic outlook is getting more promising, there are growing interests from companies to list on Bursa Malaysia.
However, despite the higher number of initial public offerings (IPOs) and bigger, broad trading volumes lately, we noticed that the general public’s buying interest, especially of retail investors, in recent IPOs remains low.
If we were to scrutinise IPO prospectuses, we will seldom come across one that states the main purpose of the company seeking to go public is to share its profits with the investors. Instead, most companies would want the investors to share the risks involved in running the companies.
Hence, more often than not, the first few sections of the prospectuses will highlight all the risks involved in buying into those IPOs.
Investors need to understand that buying into IPOs does not necessarily mean investors can make quick gains. Sometimes, they may need to hold on to those investments for medium to long term.
There are two main types of share offerings:
- public issue and
- offer for sale.
Public issues involve companies issuing new shares to investors and the money raised will be channelled into reducing companies’ borrowings or used for future expansion.
As for offer for sale of stock, the shares that investors subscribe to are from existing company owners. Therefore, the money raised from the new investors will be channelled to existing owners, which also means the existing owners will have cashed out a portion of their investments in those companies.
Let’s assume Company A offers 25% of its shares to the general public (line f) and the type of offering is offer for sale. If the IPO price to book value per share is about four times (line e), the offer for sale of 25% of its outstanding shares will allow the existing owners to recoup all of their initial capital invested in the company (Line g, h and i).
Even though this does not imply that Company A is not able to perform in future, investors need to understand that the remaining 75% of the shares or 1,534 million (0.75 x 2,045 million shares) owned by the existing owners are in effect “free” to them.
If Company A is fundamentally strong with good future prospects, then investors should not be too worried about the existing owners cashing out.
However, if the fundamentals of Company A start to deteriorate, investors need to be extra careful as the remaining 75% of the shares owned by the existing owners are now costless to them. Under such circumstances, every share the existing owners manage to sell into the market, regardless of the price, is extra gain for the owners.
Therefore, the existing owners can afford to sell the shares at any price they wish. However, if the price is below what retail investors had paid, it will mean a loss to them.
● Ooi Kok Hwa is an investment adviser and managing partner of MRR Consulting.
http://biz.thestar.com.my/news/story.asp?file=/2010/5/5/business/6190058&sec=business
No comments:
Post a Comment