Sunday, June 12, 2011

The Unintelligent Investor's Definition of the Week: IPO

Initial Public Offering

Oxford Dictionary’s definition: The act of offering the stock of a company on a public stock exchange for the first time.

The Unintelligent Investor’s explanation

Oxford dictionary’s definition explains it all. An IPO is when a private company sells shares to the open public and list their company on a public exchange for the first time or if a company re-list after become private.

It is usually done by companies that are smaller or younger to raise capital by selling shares to the public. A recent example will be Kathmandu I guess. They were facing bad retail conditions worldwide, had high debt levels and saw a drop in profit. When they wanted to float, their asking prices were around 1.65 to 1.90, hence raising between 277 and 374 million dollars. They eventually floated at 1.70 dollars. So the money they raised from this IPO allowed them to acquire Milford Group Holdings which owns the Kathmandu business and reduce their debt levels.

Big companies like Facebook, do not need to float because they have more than enough capital to go around. I guess an advantage of remaining private is you do not need to be as transparent as public companies and as my dad said, there is a lot less paperwork lol.

That being said, big companies do offer IPOs as well. Recent examples would be QR National at 7 billion and Myer at 3 billion. QR National used some of the capital they raised to expand their rail network and I don’t know why Myer floated. I guess there is no such thing as too much capital.

As investors IPOs can be very good opportunities because some might argue that we’ll never get to buy the company at such a low price ever again. However, due diligence is a lot harder because the only information we have from the company is their prospectus which is usually filled with crap and things to remind you who good their company is. Unlike investing in an already listed company, we cannot just go to ASX.com.au and find information on the company. Remember that prospectuses are design to entice and brokers are paid for selling IPOs. So there could be a possible conflict of interest there.

So are IPO’s sure win investments? My answer will be probably not.
Below are 3 charts of the 3 companies mentioned in this post.

Myer
Kathmandu
QR National
These charts are taken from ASX.com.au

You wont be too happy if you invested in Myer, feel allright if you picked Kathmandu and quite happy if you picked QR National lol.

So what do you think about IPOs? Have you invested in one? I personally haven’t because I don’t like investing in a company is hard to research.

Do drop me comments or send me an email. Thanks for reading! Next post Tuesday.

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2 comments:

  1. Google IPO'd at $85 per share in 2004. A subscriber to the IPO had still tripled their money at its 5-year low (November 2008, GFC) of ~250. I guess my point is that not all IPOs are the same- in 2004 someone excitable might have looked at google's success thus far, its corporate culture and its 'bluewater' prospects and picked it as a winner. Admittedly, in 2004, a lot of more conservative people dismissed it as hugely overvalued and with no real prospect of turning searches into dollars.

    GOOG closed on friday at $509.51.

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  2. a good company is a good company lol.

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