Ipo and a Case in Vietnam
Initial Public Offering (IPO) is an alternative for company to obtain long term financial resources. The IPO funds are usually used to pay liabilities in order to improve its performance or to expanse the business. By going public, company automatically improves its performance because previous owners and public society own it. One of the indicators to measure the company performance is using financial ratio. The financial ratios include liquidity ratio, leverage ratio, and profitability ratio.
The objective of this study is to find out whether an IPO creates or destroys the value of a company via building an analytical framework and apply it in one case study – FPT Corporation.
The hypothesis of this research is that there is significant financial performance increase or decrease on each ratio after IPO. The method is comparing the pre- and post- IPOs’ financial ratios in order to examine how an IPO affects the firm’s performance. The result of this research shows that IPO has significant influence on the increase of current ratio, quick ratio, and net profit margin ratio.
On the contrary, IPO has impact on the decrease of debt to equity ratio. 1.
INTRODUCTION 1. 1. Initial public offering An initial public offering (IPO), referred to simply as an “offering” or “flotation”, is when a company (called the issuer) issues common stock or shares to the public for the first time. They are often issued by smaller, younger companies seeking capital to expand, but can also be done by large privately-owned companies looking to become publicly traded.
In an IPO the issuer may obtain the assistance of an underwriting firm, which helps it determine what type of security to issue (common or preferred), best offering price and time to bring it to market. An IPO can be a risky investment.
For the individual investor it is tough to predict what the stock or shares will do on its initial day of trading and in the near future since there is often little historical data with which to analyze the company.
Also, most IPOs are of companies going through a transitory growth period, and they are therefore subject to additional uncertainty regarding their future value. 1. 2. Reason for listing When a company lists its shares on a public exchange, it will almost invariably look to issue additional new shares in order at the same time.
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 stock market investors to provide it with large volumes of capital for future growth. The company is never required to repay the capital, but instead the new shareholders have a right to future profits distributed by the company and the right to a capital distribution in case of a dissolution. The existing shareholders will see their shareholdings diluted as a proportion of the company’s shares. However, they hope that the capital investment will make their shareholdings more valuable in absolute terms.
In addition, once a company is listed, it will be able to issue further shares via a rights issue, thereby again providing itself with capital for expansion without incurring any debt.
This regular ability to raise large amounts of capital from the general market, rather than having to seek and negotiate with individual investors, is a key incentive for many companies seeking to list. 1. 3. 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 • Self distribution of stock 2. DEVELOPING THE ANALYTICAL FRAMEWORK 2. 1.
Main advantages of a public company 2. 1. 1. Access to capital to fund growth
Public placement of shares on a stock exchange allows the company to attract capital to fund both organic growth (modernization and upgrade of production facilities, implementation of capital-intensive projects) and acquisitive expansion. It is often the case that the available sources of funding (retained earnings, owners’ equity, other private capital) are insufficient for implementation of serious expansion plans.
Also quite often, debt funding may be unsuitable for such plans – for example, interest rates could be excessively high or maturity periods could be unreasonably short.
In such circumstances, an IPO becomes one of the most realistic and convenient ways to secure the continuing growth of the business. The new share capital allows the company to make time-crucial capital expenditure quickly and efficiently. IPO provides access to a massive, timeless pool of capital and boosts the investment credibility of the business. 2. 1.
2. Creation of liquidity and potential exit for the current owners Formation of a public market for the company’s shares at fair price creates liquidity and provides an opportunity to sell the shares promptly with minimal transactional costs.
The private owners of the company can dispose of their stakes in the business both during an IPO (this route is often taken by the minority financial investors such as venture or private capital funds) and at a later stage (this is often preferred by the majority shareholders). Subsequently, the market value of the business achieved at the IPO and the company’s public status form a stable basis for sustaining the accumulated capital and welfare of the private owners. 2. 1.
3. Maximum value of the company
Normally, an IPO is an offer to a large number of institutional and retail investors to become shareholders of the company. These investors have a very significant pool of combined capital, especially in such a large financial centre as London. The very multitude of large investors and their confidence in the liquidity of their investment in a public entity assure the current owners of a private company about achieving the maximum possible valuation of the business at the time of an IPO. 2.
1. 4. Enhancement of the company’s public profile
Listing on a recognised stock exchange means that the business will receive wide media coverage, usually a very favourable one, thus increasing the company’s visibility and recognition of its products and services. The company’s activities will also be reflected in the reports by professional financial analysts. Such public profile supports liquidity of the shares and contributes to the expansion of the business contacts. It also helps to increase confidence among the company’s business partners.
2. 1. 5. Improvement in debt finance terms
A company listed on a recognised stock exchange becomes a desirable and reliable partner. Banks are often ready to extend loans to public companies in larger amounts, under smaller collateral, for longer maturities and with lower interest rates. Even the largest and most prestigious banking institutions are keen to work with public companies – whose transparency and corporate governance serve as additional factors of confidence for banks and other suppliers of credit.
2. 1. 6. Extra assurances for partners, suppliers and clients
Partners and contractors of a public company feel more confident about its financial state and organisational capabilities as compared to those of a non-transparent private business. Partners take additional comfort in the fact that the public company has gone through rigorous legal, financial and corporate due diligences – all of which are required for a successful completion of an IPO.
Confidence among partners and contractors is a sound foundation for stable and predictable business relations with the public company, and allows the latter to obtain additional leverage in negotiating better terms for doing business. . 1. 7. Enhanced loyalty of key personnel Publicly available information about the share price of a public company allows development of employee motivation schemes based on partial remuneration of staff in the form of participation in the equity capital (for example, share options). Equity-based incentive schemes stimulate the key personnel to become more efficient in their work in order to support the company’s growth rates and profitable development – which in turn increase the operational and financial efficiency of the company and its market value.
Equity-based incentive schemes can only be used when the company shares are liquid and have a market value, in other words, in case the company is listed on a recognised stock exchange. Moreover, such motivational tools may help the company to attract and retain valuable employees. 2. 1. 8.
Superior efficiency of the business Conduct of various due diligences during the IPO process requires a thorough and comprehensive analysis of the company’s business model.
During the IPO implementation process, certain internal changes take place, including modification of the organisational structure; selection of the key personnel; improvement of internal reporting and controls; as well as critical evaluation of the efficiency of the entire business. Normally, such extensive internal efforts result in significant improvements of the communication system, management and controls; they also help eliminate any previously hidden shortcomings in the internal functioning of the business. 2. 2.
Main disadvantages of a public company 2.
2. 1. Loss of Ownership When companies go public, they sell shares of the company that represent a stake in the ownership of the company. The amount of the company that is sold when going public varies, but if more than half of the company’s ownership is sold in stock, the original owners risk losing control of the company. For example, if the original owner keeps a 20 percent stake in the company, another individual or group could purchase 51 percent of the company and gain control. 2.
. 2. Financial Reporting When a company goes public, it can no longer keep much of its financial data confidential. As a public company, it now falls under the jurisdiction of the Securities and Exchange Commission, which requires a number of financial disclosures to protect investor interests. In addition to the time it takes to prepare the documents, the costs for audits, publications and investor relations teams can be quite high, especially for smaller companies, according to Investopedia, a financial management website. .
2. 3. Costs A major reason for companies going pubic is the ability to raise funds for the company by selling shares. However, according to the Public Company Management Corporation, on average 15 to 25 percent of the money raised will have to be spent on the costs of the initial public offering. In addition, if the initial public offering fails to generate investor interest, the money spent on the IPO will be lost. 2.
2. 4. Investor Pressures
When a company goes public, the people who buy the shares are generally more interested in the rate of return they will earn on the investment rather than the long-term health of the company, which can put pressure on the company to generate short-term gains even if those short-term gains are not in the best long-term interests of the company. Depending on how much of the company has been sold in the form of shares, unhappy investors can force out the company’s original owner if they dislike her management style.
By considering both advantages and disadvantages of going public, a company can decide whether the company wants to be a public company or not.
The reasons of going public might be because the company has enough capital to be deposited to capital market and wants to obtain additional funds so that the company may use the funds to pay its liabilities in order to improve the financial performance and also to expanse the business. Therefore, IPO may motivate company to improve its performance. Company needs to be more transparent in giving information about its performance for both previous owner and society.
Society will have indirect control for company’s performance in which they can change the management. Because of that, company requires to improve its performance. 2.
3. Performance of company Company performance is the measurement for what had been achieved by company which shows good condition for certain period of time. The purpose of measuring the achievement is to obtain useful information related to flow of fund, the use of fund, effectiveness, and efficiency. Besides, the information can also motivates the managers to make the best decision.
In measuring the company performance, the financial performance measurement is commonly used. Financial performance itself can be observed by looking at the company financial statement provided periodically.
The financial statement will give clear information about flow of fund and also the use of fund. 2. 4. Financial ratios The Balance Sheet and the Statement of Income are essential, but they are only the starting point for successful financial management. Apply Ratio Analysis to Financial Statements to analyze the success, failure, and progress of your business.
Ratio Analysis enables the business owner/manager to spot trends in a business and to compare its performance and condition with the average performance of similar businesses in the same industry.
To do this compare your ratios with the average of businesses similar to yours and compare your own ratios for several successive years, watching especially for any unfavorable trends that may be starting. Ratio analysis may provide the all-important early warning indications that allow you to solve your business problems before your business is destroyed by them.
In this case, we use Ratios Analysis to compare company’s performance before and after IPO to see the impact of IPO on it. Hereinafter the main ratios to be used: 2. 4. 1.
Balance Sheet Ratio Analysis Important Balance Sheet Ratios measure liquidity and solvency (a business’s ability to pay its bills as they come due) and leverage (the extent to which the business is dependent on creditors’ funding). They include the following ratios: (a) Liquidity Ratios These ratios indicate the ease of turning assets into cash.
This ratio relates to the company ability to fulfill its current liabilities. Liquidity ratios examine the company ability to use its funds in paying current liabilities in which the more efficient company uses its funds, the more liquid the company will be. They include the Current Ratio, Quick Ratio, and Working Capital. (a.
1) Current Ratios The Current Ratio is one of the best known measures of financial strength. It is figured as shown below: |Current Ratio = Total Current Assets / Total Current Liabilities |
The main question this ratio addresses is: “Does your business have enough current assets to meet the payment schedule of its current debts with a margin of safety for possible losses in current assets, such as inventory shrinkage or collectable accounts? ” A generally acceptable current ratio is 2 to 1. But whether or not a specific ratio is satisfactory depends on the nature of the business and the characteristics of its current assets and liabilities. The minimum acceptable current ratio is obviously 1:1, but that relationship is usually playing it too close for comfort.
If the business’s current ratio is too low, you may be able to raise it by: • Paying some debts.
• Increasing your current assets from loans or other borrowings with a maturity of more than one year. • Converting non-current assets into current assets. • Increasing your current assets from new equity contributions. • Putting profits back into the business. The funds from IPO are in the form of cash. This increase of funds will affect the increase of current ratio.
It does not mean that higher current ratio is always good for company and on the contrary, the lower current ratio is always bad for company.
Current ratio indicates the margin of safety for creditor in short term. A company with high current ratio does not guarantee that it can pay its liabilities on the due date. It is because of inappropriate current ratio proportion, for instance quite high inventories proportion. Too high current ratio might indicate that there is too much cash.
It might be good for creditor perspective, but it is not good for shareholder perspective because there are idle funds that management cannot manage them effectively.
In contrast, low current ratio may indicate high liquidity risk, but it possibly shows that management has managed the current asset effectively. There were some researchers who use this ratio as performance indicators. Dyah (1998) and Heni (2005) analyzed the company’s financial performance before and after IPO. Dyah (1998) took several companies from many industries as her research object.
The result showed that there was significant financial performance increases on current ratio after IPO. Beside that Heni (2005) also did the same thing in which his research object was Pharmacy company.
The result was different with Dyah’s finding. The result showed that there was no significant performance increase on current ratio. From the differences as explained above the hypothesis is as follow: 1. There is significant company financial performance increase for current ratio after IPO, or 2.
There is significant company financial performance decrease or equal on current ratio after company goes public. (a. 2) Quick Ratios The Quick Ratio is sometimes called the “acid-test” ratio and is one of the best measures of liquidity.
It is figured as shown below: |Quick Ratio = (Total Current Assets – Inventories) / Total Current Liabilities | The Quick Ratio is a much more exacting measure than the Current Ratio. By excluding inventories, it concentrates on the really liquid assets, with value that is fairly certain. It helps answer the question: “If all sales revenues should disappear, could my business meet its current obligations with the readily convertible `quick’ funds on hand? An acid-test of 1:1 is considered satisfactory unless the majority of your “quick assets” are in accounts receivable, and the pattern of accounts receivable collection lags behind the schedule for paying current liabilities.
There were researches that used this ratio as performance measurement. Dyah (1998) took several companies from many industries as her research object to analyze the company performance before and after IPO. Her finding showed that there was significant performance increase on quick ratio.
Heni (2005) also analyzed the same thing as Dyah’s research. Heni took Pharmacy company as her research object.
Dyah’s finding was different with Heni in which there was no significant performance increase on quick ratio. Therefore, from the differences explained above, the hypothesis is as follow: 1. There is significant company financial performance increase for quick ratio after IPO, or 2. There is significant company financial performance decrease or equal on quick ratio after company go public. (b) Leverage Ratio
Leverage ratio is ratio used to calculate the financial leverage of a company to get an idea of the company’s method of financing to measure its ability to meet financial obligations.
The financial leverage indicates the extent to which the business relies on debt financing. Unlike liquidity ratio that concerns with short term assets and liabilities, financial leverage ratios measure the extent to which the firm is using long term debt. One of the leverage ratios is Debt to Equity ratio. |Debt to Equity ratio = Total liability/ Shareholder equity x 100% |
Hanafi (1999) and Heni (2005) used debt to equity ratio as performance indicator. Heni took telecommunication company as the research object to analyze company financial performance before and after IPO. The result indicated that there was no significant performance increase on debt to equity ratio.
Hanafi (2005) also did the same thing but he took Pharmacy company as his research object. On the contrary, his finding showed that there was significant performance increase on debt to equity ratio. Therefore, based on the difference explained above, the hypothesis is as follows. 1.
There is significant company financial performance increase for debt to equity ratio after IPO, or 2.
There is significant company financial performance decrease or equal on debt to equity ratio after IPO. 2. 4. 2. Income Statement Ratio Analysis Profitability ratios Profitability ratios are ratio that measures the overall performance of a company and its efficiency in managing assets, liability, and equity.
Profitability becomes an indicator to get profit in a certain period. Public company will try its best to increase the profit to meet investor’s needs. One of the ratios is Net profit margin ratio.
This ratio is the percentage of sales dollars left after subtracting the Cost of Goods sold and all expenses, except income taxes. It provides a good opportunity to compare your company’s “return on sales” with the performance of other companies in your industry. It is calculated before income tax because tax rates and tax liabilities vary from company to company for a wide variety of reasons, making comparisons after taxes much more difficult.
The Net Profit Margin Ratio is calculated as follows: |Net Profit Margin Ratio = Net Profit Before Tax / Net Sales |
Net profit margin ratio measures profitability after considering all revenues and expenses including interest, taxes, and non operating items. This ratio indicates comparison between net income and total sales of the company. Hanafi (1999) and Heni (2005) used NPM ratio as their performance indicator to analyze the company financial performance before and after IPO. Heni took Telecommunication company as her research object. Her findings showed that there were significant performance increases on NPM ratio after IPO Hanafi (1999) took mining company as the result object.
His finding showed different result that there was no significant performance increase on NPM after IPO. Therefore, based on the difference above, the hypothesis is as follow: 1. There is significant company financial performance increase for net profit margin ratio after IPO, or 2. There is significant company financial performance decrease or equal on net profit margin ratio after IPO. 2. 5.
Data source Data collection process is done to obtain the information. The data needed is from secondary data such as financial statements.
The data is obtained from websites of FPT Corporation and Ho Chi Minh Stock Exchange (HoSE). 2. 6.
Method The method is comparing the pre- and post- IPOs’ financial ratios in order to examine how an IPO affects the firm’s performance. 3. APPLIED CASE – FPT CORPORATION 3. 1. About FPT Corporation FPT Corporation is the leading IT company in Vietnam with ISO certifications for all fields of operation, and CMMi accreditation for software development. Additionally, FPT has obtained more than 1,000 international technology certificates granted by partners who are world leaders in technology.
Value-added services developed by FPT have always met customers’ and partners’ demands. To date, FPT has secured the trust of thousands of businesses and millions of consumers. For the past years, FPT has been voted the “Most Prestigious IT Corporation in Vietnam” by the readers of Vietnam PC World magazine. FPT has also been named “Best Enterprise Partner of the Year” for many years by Cisco, IBM, and HP and has received the “Vietnam Golden Star” award, the “Sao Khue” award and prizes, cups and medals at exhibitions and contests such as the Vietnam Computer World Expo, IT Week, nd VietGames, etc. FPT’s products and services have always won the top awards of the Vietnam Association for Information Processing, the Ho Chi Minh City Computer Association, and the Vietnam Software Enterprises Association. For its positive contributions to the IT and telecoms industry in particular, and the development of the economy in general, FPT was awarded a First Class Labor Medal by the government of Vietnam in 2003. December 13th, 2006 – Stocks of FPT were officially traded at the Ho Chi Minh City Securities Trade Centre (HoSTC).
FPT is Vietnam’s first IT company to be listed at HoSTC with 60,810,230 shares valued at VND10,000 per share. Company staff hold 66.
64%, the state holds 7. 3%, and the public holds 26. 06%, including 12. 21% held by foreign investors. In the first transaction session at HoSTC on the same day, FPT’s stocks were traded at 40 times their face value.
3. 2. Business performance Summary of business results since IPO (2007-2009) [pic][pic] 3. 3. Values that FPT has achieved since the IPO in 2006 3. 3.
1. Awareness Going public raises awareness for the company.
It increases its profile and prestige, and it offers helpful free publicity for the company. After IPO in 2006, FPT was named in the list of top 20 Vietnamese enterprises by United Nation Development Program (UNDP), awarded the world’s fastest growing companies – the award reserved for companies receiving funding from TPG in 2007. December 2007, FPT joined the list of top 10 typical names in Ho Chi Minh City Stock Exchange (HOSE), elected by the State Bank of Vietnam and D&B News Agency of the U. S.
3. 3. 2. Raises Capital Going public allows a company to raise funds and capital for its business.
Future Capital Once FPT has gone public it is easier to raise capital in the future.
FPT can go back to the public market for a secondary offering to raise more cash. The benefits above are clearly shown in the financial ratios of FPT: (1) Debt of equity ratio |Before IPO |After IPO | |2005 |2006 |2007 |2008 |2009 | |237. 02% |109. 86% |156. 31% |130.
9% |213. 43% | Source: Financial statement of FPT The table above indicates that there is significant financial performance decrease in debt to equity after IPO. Therefore, it can be concluded that IPO has a strong significant impact on the decrease of debt to equity ratio. This ratio examines the company’s ability to meet current debt obligation. Debt to equity ratio is ratio of total debt to total shareholder equity which means that company uses its own equity to finance and to pay the debt of the company. This ratio is great test of the financial strength of a company.
The purpose of the ratio is to measure the mix of funds in the balance sheet and to make a comparison between the funds that supply the owners (equity) and those which have been borrowed (debt). Leverage is used as the source of financing that has fixed cost with the greater expectation. It will give benefit such as profit for the additional future funds which is bigger than its fixed cost. Then it will increase the shareholder profit. Furthermore, leverage indicates that managers are willing to face risk of loosing control of the firm if they fail to pay the liabilities.
The company will face financial distress if it defaults on the interest and principal payment.
Meginson (1997) reveals that the leverage policy will decrease the agency cost of equity but increase the agency cost of debt. Debt to equity ratio reflects the position of a firm. It is a balance of debt owned by company with the equity of the firm. Total debt is total of short term and long term debt which include payable, obligation, and so on while the total assets is total of current and long term asset which include cash, receivable, land, building, and so on.
Higher debt to equity means company uses higher financial leverage in which it indicates possible difficulty in paying interest and principal.
Generally, the higher this ratio, the more risky a creditor will perceive its exposure in your business, making it correspondingly harder to obtain credit. This research supports Hanafi (1999) who took Pharmacy company as his research object. It is different from Heni (2005) in which the result could not show the impact of going public on debt to equity ratio of Telecommunication company. Thus, Heni’s research does not support Hanafi’s finding. 2) Current ratio |Before IPO |After IPO | |2005 |2006 |2007 |2008 |2009 | |1.
43 |1. 93 |1. 43 |1. 47 |1. 64 | Source: Financial statement of FPT The table above indicates that there is significant financial performance increase in current ratio after IPO.
It implies that the increase of current ratio is affected by IPO.
The higher current ratio might shows that management of company can manage well the current ratio. Accumulated fund from going public may be used as a payment for liabilities or invested as current assets, so the current ratio will be increased. This research supports Dyah (1998) who took companies from many industries as her research object. Dyah’s finding does not support Heni’s finding. Heni (2005) took Pharmacy company as the research object in which her finding could not show the impact of going public on current ratio of Pharmacy company.
3) Quick ratio |Before IPO |After IPO | |2005 |2006 |2007 |2008 |2009 | |1. 16 |1. 56 |0. 96 |1. 09 |1. 34 | Source: Financial statement of FPT The table above indicates that there is significant financial performance increase in quick ratio after IPO.
By observing quick ratio, it will show company’s ability in fulfilling liabilities by considering more liquid assets. There is a tendency that if current ratio increases then quick ratio will also increase but quick ratio is more accurate. It is because quick ratio excludes inventory from cash resources, recognizing the conversion of inventory to cash is less certain, both in term of timing and amount. The included assets are liquid assets because they can be quickly converted into cash. This ratio indicates that higher quick ratio might show the company ability to control the current liabilities.
The quick ratio is a more test of short run solvency than the current ratio because the numerator eliminates inventory, considered the least liquid current assets and the most likely source of losses.
Quick ratio is similar with current ratio in which too high quick ratio is not always good for company. Higher risk ratio may reflect that there are too much idle funds that management cannot manage the current asset effectively. In the other hand, lower quick ratio indicates that company has higher liquidity risk. This research supports Dyah (1998) who took companies from many industries as her research object.
While Heni (2005) who did the same thing in the Pharmacy company. The result showed a different thing that Heni (2005) could not show the impact of going public on quick ratio of Pharmacy company.
(4) Net profit margin ratio |Before IPO |After IPO | |2005 |2006 |2007 |2008 |2009 | |1. 99% |2. 10% |5. 46% |5. 10% |5.
8% | Source: Financial statement of FPT The table above indicates that there is significant financial performance increase in net profit margin ratio after IPO. This increase is affected by IPO. Generally, net profit margin ratio indicates company’s ability to get more profit at certain level of sales. In this case, IPO is intended to improved the financial performance. Net profit margin ratio increases mean company has good performance. Net profit margin is chosen as the representation of profitability ratios to measure how much net profit will be earned by the company in each company selling.
Moreover, this ratio also has benefit to measure total efficiency level paid as the cost in company’s operation. The more efficient a company pays the operational cost, the bigger profit level will be. This research supports Heni (2005) who took Telecommunication company as her research object. Hanafi (1999) who did the same thing in the Mining company had result that there was no impact of going public on profit margin ratio of Mining company. Therefore, Heni’s research does not support the Hanagi’s finding. 4.
The purpose of this research is to build an analytical framework for the impact of Initial Public Offering (IPO) on a company. Then we can apply the framework to FPT Corporation listed on Ho Chi Minh Stock Exchange (HoSE) by analyzing and comparing the financial performance of the company before and after IPO. The results of the research show that after IPO there are some increase performance indicators on current ratio, quick ratio, and net profit margin while there is debt to equity ratio which shows decrease performance indicator. In general, IPO creates value for the company.