Wondering Whether Should IPO Investor Look For Long Term Or Short Term Gains
In an April 13, 2010, Businessweek article it was announced that the head of equities for TMX Group Inc. That operated the Toronto Stock Exchange and the TSX Venture Exchange had high hopes for the Canadian IPO or initial public offerings market and believed it could top CAD 6.4 billion for the year. This amount he said would be the highest in over a decade and the new issue pipeline reflected the belief the recession is over as stocks and the economy rebounded. At the end of May, a Reuters article noted that while a number of Canadian companies were ready to go public, a handful would expose themselves to the market due to the recent turbulence. Despite this, investors at the annual Canadian Venture Capital and Private Equity Association meeting in Ottawa remained upbeat about the prospects of the IPO market. The question whether should IPO investor look for long term or short term gains depends on whether investors are in for short term profits or long term gains. Given the volatility of the market, the latter may be the more prudent approach.
Now foreign companies are also seeking listings on Canadian exchanges with good reason. Even American companies are choosing the Canadian option. The online publishing company Lulu bypassed U. S. Stock exchanges and went public in neighboring Canada instead. A Canadian listing can be cheaper and require a less regulatory scrutiny. The over billion CAD raised by an Alberta oil sands company is a testimony to the Canadian market as this amount was the 2d richest debut since Manulife in 1999.
Toronto exchanges are world leaders in listings of mining, oil and gas companies. They have the second largest listing of companies, including technology company listings. They also have the most listings of clean technology companies. There is a substantial equity ownership culture in Canada with the majority of Canadians are equity owners. Canadian indices have done better than benchmark indices in other regions during the past decade.
The decision to go public is a critical point in the evolution of the company when it is ready on both the advantages and costs related to the new direction. In the majority of new IPO sales institutional investors are the biggest buyers. The interest of the investors is linked to stock market conditions as well as interest in the company itself. Sometimes lack of adequate interest can lead to pushing back of the scheduled sale or even termination of it altogether. The basic IPO valuation approaches are Cost, Income and Market valuation approaches. Another method gaining traction applies techniques of option pricing. There can also be hybrid valuation techniques using some aspects of the basic approaches.
The Basic Process
Companies that go public on a stock market in Canada become a reporting issuer with one or more of the Provincial Securities Commissions. The process of going public involves three stages: preparing to go public, going public and life afterwards as a public company. Going public can bring strategic advantages and also associated costs such as the costs of compliance, costs related to a new governance structure and need to be responsible to shareholders. The benefits include the capital to grow and evolve, provide greater flexibility for execution of strategy, a means to monetize and provide liquidity and wealth to shareholders for their investments in the company, increased market value and the stature and security of a public company and the ability to attract and retain talent with share plans that are liquid. The costs include compliance costs, the increased infrastructure such as board and audit committees, being open to regulatory scrutiny, some loss in decision making flexibility, pressure to perform, stock market swings can effect share value and employee morale and restrictions on trading and the discussion of internal affairs. Generally an IPO process takes a little over 3 months or about 100 days to complete.
Being prepared for each state makes for the smoothest transition possible. There will be a new change that companies need to be aware of. Starting in 2011, International Reporting Standards will be followed. Companies should seek the advice of their auditor about what is needed to comply.
Companies can go public and become reporting issuers through a prospectus. There are two types of prospectus. One is an offering prospectus that is used in a public sale or a non-offering prospectus that is not used in a public sale. The IPO prospectus is of the former type. Both these types of prospectuses must contain full disclosure about the company for the information of investors and the public.
The IPO How or How to IPO
The process begins when the Board approves the initial offering and the decision to hire an underwriter. Next, the underwriter and auditor do due diligence and then the drafting of the preliminary prospectus commences. After the Board approves the completed prospectus, it is then filed along with related materials. Printed copies of the prospectus are made and a mock road show is run through. Following the actual road show meetings with investors, the pricing of the offering is determined. Then, after final due diligence, there is the step of Board approval of the final prospectus incorporating the pricing and feedback from investors and regulators . Subsequently, there is filing of the prospectus and exchange listing document and copies of the final prospectus are printed for dissemination. Next, the trading begins. Announcements on IPO Canada exchanges lead to initial enthusiasm. Depending on the company, its industry and its market conditions, prices can subsequently change downward.
Figuring out how to IPO can be tricky. Before taking your company public through an Initial Public Offering, be sure to learn about IPO valuation, the IPO market, and the Canadian IPO process from professionals who know it best.
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