IPO(Initial Public Offering) Explained

Definition and the process through which it is acquired

What is an IPO?

An IPO is an initial that stands for the Initial Public Offering. An IPO refers to the process by which a company (as registered under the companies Act) decides to switch from private to public and in the process it is therefore required to sell off the stocks belonging to the company.

An IPO consumes quite some time for it to be accomplished. It requires good planning and some quality of consideration of certain aspects for it to be attained.

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It must be noted that a company cannot be able to sell it stocks to the general public if it has not conducted an IPO. The main reason being that, the IPO changes the status of the company’s shareholding from public to private nature.This does not mean that a company that conducts an IPO has no shareholders in the first place. A company that is privately owned has private shareholders.

Private shareholders are often few in number and hence such a company has lesser activities as compared to that with an IPO. When a company decides to go public, it, therefore, opens doors for the general public to buy shares from it and the company becomes subjected to regulations from Exchange Commissions like the Nairobi Security Exchange for the case of Kenya.

The company decides to adopt an IPO because of the following reasons:

1. Selling shares publicly helps a company to raise more money and pump it into business through re-investing or investing in other money-making projects.

2. A company that has gone public wins more trust and confidence from the general public as well as those who wish to invest in.

3. Having many shares and shareholders is a sign of prestige and it often gives a company an upper hand in securing of some business deals.

According to LOYAL3, there are six steps that a company, which has decided to acquire the status of an IPO go through (five are applicable in Kenya)

1. Bank hiring. The company has to hire an investment bank. The investment bank will then help the company to focus on the financial needs as well as the projected finances that are likely to be raised.

2. Submitting documents to Nairobi Security Exchange. The NSE is the agency that is mandated with the regulation of stock trading as well stock exchanges in Kenya. The documents are meant to explain the business of the company, the risks that are prone to happen and how the company is going to protect he investors.

3. Handing out the preliminary prospectors. This is a document that lists the estimated price range for one share of the company’s stock.

4. Going on a road show. This is now making the interests and the intentions of the company to go public known to the potential investors. Most companies, however, instead of going on a road show, they use the media to reach out to potential investors.

5. The agency mandated with the regulations of the stocks makes the statement public and gives a go ahead for the purchases to be made.

When a company acquires the status of an IPO, it becomes under the watch and scrutiny of the Nairobi Security Exchange (NSE) as well as Capital Market Authority (CMA). The company, therefore, is at liberty to disclose rules and regulations like holdings, investments as well as transactions of its employees including the directors at the helm of the company. The company practically comes under surveillance and its financial activities as well as the trading activities on the stock market are closely monitored. The company will also be required to announce its financial results quarterly and publicly and then full year financial results as well as holding a shareholders meetings.

Before investing in a company that has gone public, a potential investor is given time to go through the company’s prospectors. This is like an invitation that gives a clear overview of the shares being offered, the prices and is what an investor bases on to whether to buy or to subscribe for the shares in the said company.

Why must one read the prospectus?

This is a very important document. For an investor, it is the means by which one can judge how profitable and viable the investment is before one decides whether or not to participate in an initial public offer. An uninformed decision may cost an investor dearly. One must, therefore, read the prospectus very carefully and understand what is really at stake before he/she makes a decision. One should carefully assess the fundamentals of the company offering shares by studying the information provided. Though IPOs appear to be a good investment opportunity because of the general expectation of earning high initial returns, called premiums, risks do exist and there is no guarantee that prices may not fall once the shares start trading in the secondary market.

What one should look in prospectors?

What goes into a prospectus is currently governed by the Companies Act, the Capital Markets Act and the Capital Markets (Securities) (Public Offers, listing and Disclosures) Regulations 2002. While the contents of a prospectus are generally the same, the 3 3 presentation may vary from one issuer to another. By reading the prospectus, one may want to know about the future of a company and whether or not its business will grow.

Bigger turnovers generally mean bigger profits and therefore should lead to enhanced share prices. But numbers do not always tell the whole story. One needs to go over the prospectus with a fine toothcomb for hints on the company’s growth prospects and risk factors. An investor should also want to know who manages the company, what products it sells, who buys the products, and whether or not its business is sustainable. Key information on these aspects can be found in various sections of the prospectus. Investors need to scrutinize and seek advice where they cannot understand. This can be done by analyzing; Basic Information; indicative offering timetable; definitions; corporate directory; summary information; summary of share capital, issue/offer statistics, indebtedness and intended use of the proceeds; details of the public offering; business information; financial information; shareholders, directors and management information; risk considerations associated with business and prospects of company; appendices; and procedures for application and acceptance.