The former director general of the Securities and Exchange Commission (SEC), Mr. Adu Anane Antwi, has always maintained that it is better to own 1% of a GHC100 million company than a 100% of GHC1 million one. Aside from the fact that the math checks out, the statement makes a lot of economic sense to invite investors into your business to take it to the next level of growth and prosperity.
Floating shares to investors has been an age old activity with the first share issue dating as far back as the early 1600s when the Dutch East India Company went public in an Initial Public Offering (IPO). Companies float shares for a number of reasons, chief amongst them are to get funding for expansion, diversify their shareholder base, modify their capital structure and due to regulatory pressure. In Ghana, there has been a lot of cry about the government putting pressure on multinational companies to float their shares to the public so the local populace can enjoy some of the profit from these businesses. Most businesses cited are in the banking, insurance, mining and telecommunication sectors. The cry is louder for the Telcos because almost everybody uses a mobile phone nowadays and buys top-up credit every time. There is a current rumor that MTN, the biggest Telco in the country, is possibly planning on floating shares to the general public. The question then is: who benefits when these companies go public and who loses out?
A LOT OF ADVANTAGES ACCRUE TO THE INVESTOR IN AN IPO
IPOs always generate certain frenzy among investors especially because companies that want to go public create a lot of public awareness through the media. For example, take the case of MTN– the mobile network giant that has given some indication of floating shares in the near future. Although, the time table for the share floating has not been announced I have had investors come to me to inquire when the IPO will be done.
Investors are justified one or the other in being impatient about companies coming to the market especially the big, successful and well-known companies. It is akin to the release of a much anticipated movie that creates a heightened sense of expectation. If the company can meet expectation then investors will have a blockbuster on their hands. With all the hype around a company going public, it is possible to see a surge in price a few days after the public offer. The internet is awash with stories about investors who became overnight millionaires after buying into an IPO. But as the advice always goes – caveat emptor; let the buyer beware!
In an IPO, companies are required to disclose a lot of information to make it possible for investors to assess the risk and reward inherent in the company. This will benefit the investor because all the relevant information to assess the company will be available. An unlisted company will not go to that great length to provide that amount of information to any investor who wants to buy into the business.
There is also the benefit of buying the share at a very favorable price– you get in on the ground floor. In coming up with a price for an IPO, a lot of discounts are applied to make the price very attractive to investors. This means that for a very successful company, the IPO price will be one of its lowest price points and therefore it makes a lot of sense to get it at the point. If the company continues to do well over the long term, those who got in on the ground floor will go up many floors.
One of the good things about a public company is the fact that when you are unhappy with the company’s performance, you can always offload on the market. You might be wondering who out there will buy a share another investor doesn’t want? This happens because of The Greater Fool Theory of Investing. A discussion of which can be held on another day.
THE COMPANY BENEFITS EVEN MORE
Using MTN as an example to emphasize the benefits that accrue to the floating company, it is important to note that the company benefits more after an IPO. MTN’s decision to float shares is a good choice because a lot of Ghanaians have been craving and hoping the company does such so the public feel involved in tremendous growth and successes it is achieving likewise other multinational companies.
One of the key reasons a company goes public is to fund its growth drive and IPOs provide one of the cheapest sources of raising such money for expansion. This presupposes that a company raises money when it expects the return on the investment made with these funds will be more than the cost in obtaining them. What even makes it more advantageous for the company is that subsequent fund raising effort will be much easier after a successful IPO.
Post IPO, firms will be able to negotiate favorable terms on loan facilities with financial institutions and other related entities. Most businesses, especially unlisted firms, are less transparent and provide very few disclosures in their financial report, thus making banks uncomfortable extending financing to these institutions. In preparing for an IPO transparency and disclosure requirement are significant so as to assist investors to make sound judgment about the risk and the expected reward from investing in the business.
Post IPO, firms have an ongoing obligation to disclose material information and significant development that can affect the value of the business or its profitability. This gives banks the added comfort of being able to assess the risk in loaning money to the business and makes it possible for them to give higher loan amount with little need for collateral, longer maturity and lower interest rate. Which business will refuse this offer?
Listed companies get a lot of scrutiny from investors, the general public and regulators and therefore are very conscious of value- destroying activities. The increase scrutiny forces a business to become more efficient and increases management resolve to run the business well to make the external shareholders happy.
Human psychology also plays part in providing some benefits to a business that has gone public. In the case of multinational companies, the general public has complained over the years about the companies making lots of money from Ghana without the Ghanaian investor getting a share of the pie. Going public will increase a company’s public profile and research has shown that investors perceive a listed company in a more favorable light than an unlisted one.
The same psychology also boosts the morale of those working in a publicly listed company because it is more prestigious to be associated with a company that is in the public domain than one that is not. This provides the necessary incentives to make workers more productive and more concerned with making the company successful, not to mention the financial rewards associated with being productive. Workers are also rewarded with shares in the company for their effort which means they can share directly in the company’s fortunes. What do you think this will do to employee loyalty?
The company’s stakeholders, those doing business with it, will feel very confident about doing business with the company and will therefore give the company favorable business terms in transactions. This stems from the fact that a listed company is more transparent and their financial statements can withstand a lot of scrutiny because of all the due diligence processes the company goes through before the listing.
THE ECONOMY AND THE COUNTRY– NOT LEFT OUT!
Not only do we have the investor and the IPO Company benefiting from the public floating but the economy also gets its fair share of the spoils. It has been established that listed companies pay their taxes regularly and are more likely to comply with government regulations than unlisted companies. The companies also become bigger, they are better managed and therefore likely to be more profitable and therefore the taxes received by government will also be bigger.
A larger company will also employ more people and pay them much better and therefore level of unemployment will reduce over the long run and the living standards of employees will improve. Richer employees will spend more thus increasing economic activities and an improvement in the country’s GDP.
Another benefit for listing, more subtle than the others, is that the more listed companies there are in a country the more their performance will track the general economic performance of the country, making it much easier to measure economic activity. It also makes the economy more efficient and robust which will increase the confidence other countries have in doing business with the country.
In a nut shell, everybody benefits in an IPO: the investor, the company and the economy as a whole. The investor, however, gains more because IPOs are most of the time priced cheaply so you get in on the ground floor, the company provides a lot of information making assessment thorough and when you are not happy with the company there is always an avenue to sell off your shares. So, the next time an IPO comes up don’t let the moment pass you by, do your own assessment or get professional to help you do it and if the company is good you never know, that might be your ticket to La Volce Vita!