Managing Finance: Evaluating the Impact of IPOs on Company Performance

Running Head: Managing Finance
Managing Finance
[Type the author name]

Managing Finance
Contents
Executive Summary............................................................................................... 2
Introduction........................................................................................................... 2
Uses of funds rose from IPO............................................................................... 2
Evaluation of the statement “IPOs are a costly way of raising long term finance
for corporations”................................................................................................ 3
Underpricing of Initial Public Offerings (IPOs).....................................................4
Australian Initial Public Offerings (IPOs) Activity for the period 2007 and ending
2017................................................................................................................... 4
Performance of company’s share price after IPO................................................6
Conclusion........................................................................................................... 11
References........................................................................................................... 12
Appendix.............................................................................................................. 14
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Managing Finance
Executive Summary
This report is prepared to evaluate the company’s performance after it opts for
going public. In order to study the effect of IPO on the company’s performance;
three companies from three different sectors are chosen. The report analyses the
effect of IPO on firm’s cost of equity and for this, the cost of equity before the IPO
and cost of equity after the IPO are calculated for each of the three companies.
In order to study the effect of IPOs on share price of the company, the growth of
share price for a period of five years after the listing, are calculated. All the
calculations can be identified in appendices. The result drawn from the
calculation and analysis shows that IPOs increases the cost of equity of firm.
Also, share prices of the companies decrease over the long term period and the
main reason behind such a fall is companies over valuate their shares at the time
of IPO.
Introduction
As we know every company require funds to manage and operate the business successfully.
There are various sources of finance. Majorly, there are only two sources, first is debt
financing which are usually chosen by the companies to finance its short-term requirements
and the second is equity financing which are opted to finance the long-term requirements. In
order to raise capital through equity private companies get themselves listed on the stock
exchange and come up with IPOs. It has always been a matter of debate, whether the IPOs
actually prove to be beneficial for the company’s performance or it hampers the overall
performance. There are arguments like cost of IPOs are usually high, on an average the IPOs
of the company appears to be underpriced, the market function actually determines the IPO
activities and after IPOs the performance of the company in the long run is usually not
impressive.
Uses of funds rose from IPO
Virtus Health issued IPO on 11th June, 2013. The company used the IPO fund for starting a
new facility of ARS at Burwood, New South Wales. The company carried out the process of
expanding the capability of Werribee facility situated in Victoria. These facilities included
the services relating to laboratory which facilitated the patients with more appropriate
services of fertility in Geelong and the West Melbourne suburbs. Apart from this, in order to
meet the increased demands put by the patients, the capacity of TFC Springwood in
Queensland was expanded (Annual Reports, 2014). Virtus Health had started Virtus Fertility
Centre situated in Singapore at the Scotts Medical Centre after seven months of launch of
IPO (Virtus Health, 2014).
GDI Property Group issued IPO on 17th December, 2013. The funds received from the issue
of IPO were utilised to obscure business from GDI group of companies and partnerships
(Vendors Offer). The amounts were also used to meet the share of cost related to IPO,
providing the same with working capital. The consultation fees paid to Mr Williams for
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Managing Finance
providing consultation advice relating to IPO were reimbursed from the amount received
from IPO (Annual Reports, 2015).
Pact Group Holdings Limited came up with IPO on 17th December, 2013. The proceeds
received from the IPO were used to repay the US dollar denominated Term Loan B.
Revolving credit facilities were also repaid by the Pact Group Limited from the amount
received from raised IPO. The company even moved into a fresh secured revolving credit
facility with a group of nine banks, where committed lines available totalled A $590 million
and NZ$180 million. The company took 100% shares of Viscount Plastics (China) Pty Ltd,
Asia Peak Pte Ltd and Ruffgar Holdings Pty Ltd. The IPO proceeds were also used to acquire
49% shares in Cinqplast Plastop Australia Pty Ltd. The outstanding promissory note which
was owed to the former holding company of the group by Pact were also refunded from the
fund received from IPO (Annual Reports, 2014).
Company
Name
Indus
try
Date of
IPO
Amount intended to raise Amount
actually
raised ($
‘000)
The purpose
of the funds
GDI
Prperty
Group
REIT
-
Offic
e
17th
Decemb
er, 2013
$287m 23,786 Acquire
business from
GDI group
and
partnership
firms
Virtus
Health
Medi
cal
Care
11th
June,
2013
$255m- $295m 231,981 Start a new
facility of
ARS at
Burwood,
New South
Wales
Pact
Group
Pack
aging
&
Cont
ainer
s
17th
Decemb
er, 2013
$581.54 m 648,800 Repay the
dollar
denominated
Term Loan B
3