An initial public offering (IPO) or stock market launch is, as it sounds, the first sale of a company’s shares to the public and the listing of the shares on a stock exchange. In the UK, IPOs are often referred to as flotation. IPO was originally an American term but is now used across all world markets. The shares offered may be existing ones held privately, or the company may issue new shares to offer to the public. Companies choose to offer shares to the public to raise new capital for the company; to widen the shareholder base of the company; to give the shareholders a liquid market in which to trade their share; achieve the publicity that a public listing brings. Companies might choose to list on the market by a private placing of shares to institutions rather than a public offering.
There have been several online flotation sometimes referred to as EPOs (Electronics Public Offerings). Many companies that undertake an IPO also request the assistance of an investment banking firm acting in the capacity of an underwriter to help them correctly assess the value of their shares, that is, the share price. Whoever is raising the funds, the process of flotation is arduous, involves significant time commitments from the company’s management and advisor (investment bankers, stockbrokers and solicitors amongst others), and is not cheap.
This effort is expended in order to raise the cash required at a price that keeps both the vendor and the purchaser of the shares happy. 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 itself with capital for future growth, repayment of debt or working capital.
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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. The three main interested parties in an IPO (the vendor, the company, and the investor) have complementary objectives. The Company will want to:
- Maximize proceeds
- Build broad and stable ownership base Raise its profile
- Facilitate future fund raising and possibly future acquisitions
- Ensure that there is a good liquidity in secondary market trading
- Be seen as launching a successful IPO.
The Vendor, or selling shareholder, wants to:
- Maximize proceeds
- Maximize value of retained interest/share price performance
- Be seen as part of a successful transaction
Investors will want to:
- Maximize share price return (short and long-term)
- Broaden and diversify portfolio
- Accumulate a position not easily found in the secondary market
Companies undertake an IPO for one of two reasons:
- To raise capital for the company’s use (a ‘primary’ offering).
- To raise funds for the existing shareholders (including venture capitalist and governments, as in privatizations, etc. ) (a ‘secondary’ offering).
The terms primary offering or primary issue and secondary offering or secondary issue are often used to classify the recipient of the proceeds. Proceeds from a primary offering go to the company – it creates and issues new shares for sale to the public. Secondary offering sells existing shares to the public. Many IPOs combine primary and secondary offerings.
In general, capital raising IPOs are undertaken in order to: Raise cash in order to expand the business of the company, or Reduce the debt levels (leverage or gearing) of the company. The decision to go public for many companies is a strategic decision, not just a fund raising decision. The IPO process can be a catalyst for developing the company’s strategy more fully. It can also be seen as the final step in the financial development of a company.
Reasons for secondary sales include:
- Sale by entrepreneur
- Tax and other personal reasons
- ‘Cashing in’
- Sale by professional investors
Imposing private market disciplines on management and workers – thereby increasing efficiency and service to customers. *Fostering a shareholders democracy. Winning votes (although this is not explicitly stated).
Advantages of an IPO The advantages of going public include:
- Liquidity and increased share price
- Management and employee motivation Enhanced image/prestige
- Access to alternative source of capital
- Ancillary benefits
Advantages of investing internationally:
- More securities and industries to choose from – even large markets don’t have shares in every sector.
- Greater returns – many emerging markets provide higher rates of return than do more mature markets and some markets may not be as efficient as others, allowing professional investors an advantage.
- Reduction of risk – not all national stock markets advance (or decline) at the same time. Therefore international diversification may reduce risk in an investor’s portfolio. Liquidity – some institutions demand significant liquidity in their portfolios, which can only be met by investing in the largest global companies.
- Single European currency – many investors now look at the Eurozone as a single country for portfolio purposes. An investor in France, for example, no longer considers France to be his home market; the entire Eurozone is now treated as the domestic market.
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
Disadvantages if selling to and maintaining an international investor base:
- Cost and complexity
- Increased disclosure requirements
- Flow back Procedure
A lot of things have happened since then – the most significant of all being perhaps the Asian monetary crisis in 1997. Here are the histories of BCA from 1997 until BCA do the IPO in May 2000: 14-15 November 1997, BCA’s customer makes a rush of BCA because Soedono Salim alias Liem Sioe Liong, its majority shareholder, rumored dead. The new rush subsides after Liem appear in public. 18 May 1998 until beginning of June 1998 BCA’s customer back to panic after the riots of May, so do the rush. As a result, BCA limiting customer withdrawals, via cashier Rp. 5 million, Rp. 500 thousand via ATM Silver, and ATM Gold is Rp. 1 million. 28 May 1998, BCA officially became “patient” of Badan Penyehatan Perbankan Nasional (BPPN). Bank of Indonesia inject funds up to 200 percent of BCA’s capital. Badan Penyehatan Perbankan Nasional (BPPN) took over the authority of directors and commissioners of BCA and form a team led by Director of Bank BRI, DE Setiyoso. 25 August 1998, Government announced that the deadline of completion of Bantuan Liquiditas Bank Indonesia (BLBI) by the old owner is 21 September 1999. 22 September 1998, Head of BPPN, Glenn MS Yusuf, states that Salim Group accept the obligation to pay Rp. 35 trilliun to his side. With this agreement, the shares of the Salim Group transferred to BPPN with its cash and property. The government has 92. 8 percent shares of BCA and the rest is owned by Salim Group and several other parties. 29 September 1998, Head of BPPN, Glenn MS Yusuf, said the government will inject capital considered sufficient to meet the category of healthy banks.
This funding will be converted into shares of government. *23 April 1999, BPPN said government would sell its share in BCA to the public and after that the shares will be offered to the strategic investors. 4 February 2000, BCA register its plan for sell the shares to Badan Pengawas Pasar Modal. BCA plans to sell 42 percent of its share. 22 February 2000, BPPN suddenly delaying the implementation of BCA share offering to the fiscal year 2000 (April – December 2000) with reason that the BCA’s IPO preparation need more time. 3 March 2000, BPPN declared that BPPN unsure to get Rp. 3 trillion from these stock offering. 10 April 2000, President Director of BCA, DE Setijoso, declared the maximum number of shares of BCA’s share that offered by Badan Penyehatan Perbankan Nasional (BPPN) reached 883. 2 million shares. While the range of BCA’s share on IPO ranges from Rp. 1. 350 – Rp. 1. 750 per sheet. It means, the maximum acquisition target of BPPN reached Rp. 1. 5456 trillion about half of the target. 27 April 2000, BPPN officially returns BCA from BPPN to BI.
With this return to BI BCA, then BCA became the first bank that came back from recovery state of BPPN. From the history of BCA from 14 November 1997 to 27 April 2000, we can conclude that reason for BCA to go public is because of the crisis that happened in BCA that happen 2 times that caused by: 1. Soedono Salim alias Liem Sioe Liong, its majority shareholder, rumored dead. The riots in May 1998. So that BCA need to go public to get fund injection to recover the financial condition of BCA.
- Geddes, Ross. IPOs and equity offerings. Burlington : Butterworth-Heinemann, 2003. financeglossary" Great Investor Network. 7 January 2011 <http://www. finance-glossary. com> "::BCA::" PT. Bank Central Asia. 7 January 2011
- <http://www. klikbca. com> "Tempointeractive. com – Perjalanan BCA sejak 1997" Tempo Interaktif 26 Februari 2002. 7 January 2011
- <http://www. tempo. co. id/hg/ekbis/2002/02/26/brk,20020226-17,id. html> "Initial Public Offering" Wikipedia. 7 January 2011
- <http://en. wikipedia. org/wiki/Initial_public_offering> "Bank Central Asia" Wikipedia. 7 January 2011
- <http://en. wikipedia. org/wiki/Bank_Central_Asia>
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