What You Should Know About IPO’s

When a company announces its initial public offering or IPO, it’s akin to a clarion call for many investors. Raising their heads (and sometimes their eyebrows) at the sound, they scramble to find out all they can about that company. Or, if it was a company they’ve already been on the look out for on the bourse, they scramble to see how soon they can snap up some of its shares.

But stock market sages urge caution when it comes to jumping on any investment bandwagon, and IPO’s are no different. In today’s post, we’ll take a quick look at how companies make their debut on the Singapore Exchange, how they get investors to buy their shares, and what investors ought to look at before buying an IPO.

Making an IPO in Singapore

A company that wishes to make an IPO on the SGX goes through several months of preparation. Assessments need to be carried out in order to make sure the company is eligible for listing. Then audits, restructuring and due diligence are performed, which is where a company’s value and the number of shares it can sell are determined.

The resulting paperwork from these procedures then goes to the SGX for its go ahead. Once the SGX gives its seal of approval, the IPO proper is made and the public is welcome to buy shares. The company can also pay a broker to “underwrite” the IPO, or make sure that all its shares will be sold.

Making a case with investors

Even before the time comes, it’s natural for a company to find and convince investors to buy its shares. Though public relations is usually the most-travelled route in this case, the best way a company can ensure the success of its IPO is by making a name for itself with strong product or service offerings and a clear growth strategy.

Pricing the shares of an IPO is also a primary method of attracting investors, as well as a tricky one — too low, and the IPO might not be able to raise the hoped for amount; too high, and investors might be turned away.

The underwriters themselves likewise have a hand in promoting an IPO by approaching potential institutional investors. Sometimes, this involves preparing presentations for the prospects or doing “road shows” and actually travelling to them.

Making the application

Investing in an IPO may not be for everybody; indeed, it may be difficult for investors to get a hold of IPO shares. But if you are an investor who is just starting out, and would like to get in on some IPO action, HealthyTrading offers a few share-shopping guidelines:

1 . Watch the news. All the latest IPOs are listed on the websites of the SGX and the Monetary Authority of Singapore. The Straits Times also usually carries a full-pager detailing any IPOs being made.

2. Go through the prospectus carefully. Found on the SGX website under Company Information, the prospectus contains details that should be given particular attention such as key dates, key ratios, and the risks that the company is exposed to.

3. Apply with conviction. Apply to buy shares only after being fully convinced of the company’s ability to deliver returns and how it helps to reach your personal investment goals. Your application status may be checked at around 7PM on the day of the ballot.

Making sure of an IPO

Before rushing off to find an IPO to buy into, investors of all experience levels would do well to look out for the following warning signs as shared by SingaporeStocksTrading.com:

1. If a company has several pre-IPO placements, or shares given to early investors before the IPO is actually made, it might be a sign that the IPO may not be as great as it may first appear. If a company truly is worth investing in, then it shouldn’t have to give out so many pre-IPO incentives to investors.

2. If the existing shareholders of a company making an IPO are selling their shares (which are then called vendor shares), that could mean that the shareholders don’t have much faith in the company, and are trying to divest themselves of their investments.

3. Other details that investors should keep an eye out for in the prospectus are deferred shares and share options. These deferred issues can inflate major short-term indicators like earnings per share and net asset value per share.

4. If an IPO has a large over-allotment option, it might be taken as a lack of confidence on the part of the underwriters that the IPO will be welcomed by investors. Over-allotment (also known as a “greenshoe” option) is when more shares than the official number are sold to keep traders from short-selling the shares when trading starts.

Not all companies have an over-allotment option; a company that does, with 10 million shares, for instance, may sell an extra million or 11 million shares total.

5. When underwriters promote an IPO to institutional investors, their sales process is called book-building. This process plays a key role in deciding on the price of an IPO’s shares and how many of those shares are going to be sold. If the company is popular and investors all want a piece of it, the underwriters might make the IPO bigger.

On the other hand, if investors generally aren’t interested, that could result in less shares and lower prices — which begs the question, just why weren’t investors interested?

6. Yet another detail to watch for in the prospectus is whether an IPO has a “clawback”option. The clawback option allows underwriters to reallocate shares from institutional investors to individual investors (or vice versa), if the response to an IPO was less than desirable.

If the IPO does come with a clawback, or if it did not receive a particularly warm welcome at the bourse, individual investors would do well to avoid oversubscribing to it, as some do to increase their chances during a ballot.

7. If an IPO has no lock-up clause, investors should just steer clear of it. Lock-up clauses prevent IPO sponsors and top company management from selling their shares on the market for an extended period of time. These clauses are made to forestall a short-term overhang of shares.

No lock-ups might be a sign of an IPO being made simply to allow existing shareholders to rid themselves of their investments.

Making a conclusion

Because of the risks involved, particularly for new investors, most experts advise extreme caution when investing in IPOs, or are against investing in them at all. But as one financial consultant puts it, the approach to choosing an IPO to invest in should be just like choosing any company to invest in — if it suits your level of risk and fits your portfolio mix, then investing in the IPO could be a good way to go.

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