IPO
What does “IPO” mean?
An Initial Public Offering is the first offering of a company’s shares for sale to the general public. In the course of an initial public offering, an additional (new) issue of shares is offered to investors. At the same time, in the course of the placement of the additional (new) issue, existing shareholders may offer their blocks of shares for sale (SPO).
The decision to enter the public market is a serious step in a company’s life and the pluses and minuses of such a decision should be weighed:
The pluses and minuses of being a publicly-held company:
| Pluses | Attracting long-term capital for the company’s development |
| Obtaining a fair assessment of the company’s value | |
| Obtaining “currency” for mergers and takeovers | |
| The possibility of withdrawal for the company’s key owners | |
| Improving the company’s image and corporate management, enhancing its transparency | |
| Minuses | Considerable time and funds spent on carrying out IPO |
| Stricter requirements for accounting and information disclosure | |
| Opportunities | Growth in the company’s market cap and diversification of the investor base |
| Improving the company’s efficiency owing to better corporate management | |
| Establishing a top management incentives system (option programs) | |
| Risks | Lower market cap in case of failure to achieve set goals |
| Possibility that strategic decisions can be blocked by minority shareholders |
More pluses than minuses!
What advantages have you found in becoming a publicly-held company?
Alexey Kuzovkin, General Director of OAO Armada:
Armada Group was the first Russian IT company to put its shares on the MICEX and RTS stock exchanges. This enabled Armada to bring its business to a new level and to begin implementing an attractive asset takeover strategy in the IT market.
Victor Salkai, Head of the Office for Investor Relations of the PIK Group of Companies:
Going public enables the company to pursue its development strategy for its business.
What are the principal reasons for issuing an IPO?
Vitaliy Nesis, General Director of OAO Polimetall
Our first reason is that the company’s value becomes clear, which is very important for companies operating in the precious metals segment. The second reason is that we needed foreign currency to acquire assets; now, in our future transactions, we will be able to use not only cash but shares as well. The third reason is that the most powerful method of retaining personnel and management is to link incentives with the value of the company’s shares. (source: Vedomosti, the 17th May of 2007, No.88 (1862)).
Why are IPOs carried out in Russia?
According to the Ernst & Young’s report Globalization: Global IPO Trends Report 2007, up to 90% of companies launching an IPO select a national stock exchange for basic listing, which may be explained by better awareness of a company in the domestic market and the possibility of becoming the leader in a specific sector.
In selecting a stock exchange, the issuer should be guided by the following criteria: comparison of liquidity, costs and investor bases.
1. The liquidity of Russian companies’ shares is concentrated in Russia.
Russian-Issued Securities Trading Volumes for Nine Months of 08
2. The Russian base of investors has diversified to a sufficient extent:
Structure of Operations at the MICEX Stock Exchange, %
| 2005 | 2007 | |
|---|---|---|
| Dealer operations | 14.00% | 31.50% |
| Legal entities | 41.80% | 20.50% |
| Individuals | 30.20% | 11.50% |
| Non-residents | 14.00% | 32.00% |
| Trustees | 0.00% | 4.50% |
| Total | 100% | 100% |
Non-residents’ transactions account for approximately 32% of the total volume of operations at the MICEX SE.
3. Costs related to carrying out an IPO in Russia are considerably lower than those on Western trading floors.
Issuers’ Total Unit Costs Related to Carrying Out IPOs
Source: Yu.A.Danilov // Russian IPOs: Goals, Special Features, Effectiveness, Prospects?
One more reason for the domestic market’s attractiveness is the growth of assets of institutional and individual investors.
As of the first half of 2007, total assets managed by Russian management companies amounted to 1.4 trillion rubles (approximately $56 bln)*. About 74% of them were assets of unit investment funds and the reserves of non-government pension funds.
For comparison, the accumulated amount of foreign investment in the Russian economy amounted to $178.5 bln in late June 2007 (including direct investment).
*Expert RA data
**the data of the Federal Service for State Statistics
Volume of IPOs, $bln
