This article analyzes the IPO activity of three selected Australian companies, the change in cost of equity after acquiring funds, the implications of underpricing, and the performance of IPOs compared to the Australian index. It also provides insights into the Australian IPO activity from 2007 to 2017.
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Running head:MANAGING FINANCE Managing Finance Name of the Student: Name of the University: Authors Note:
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MANAGING FINANCE 1 Table of Contents Introduction:...............................................................................................................................2 a. IPO activity of the three selected companies, while stating how the manger used the acquired funds:...........................................................................................................................2 b. Change in cost of equity of the IPO after acquiring the required funds:...............................4 c. Critically discussing about the implication of the under-pricing and how it changes from industry to industry:...................................................................................................................5 d. Australian IPO activity analysis from 2007 to 2017 and comparing the results with the Australian economy:..................................................................................................................6 e. Comparing the 5 years performance of the IPO with Australian index:................................7 f. Comparing the 5 years performance of the IPO with dividends vs Australian index:...........8 Conclusion:................................................................................................................................9 References and Bibliography:..................................................................................................10
MANAGING FINANCE 2 Introduction: Australian IPOs has been one of the major contributors to the funds of many organisations, where national companies have acquired funding to support their operations and expansion plans. One of the major IPO of that conducted in Australia was JH-HI-FI, where the organisation overall share increased from $2.17 to $25.60. This mainly states that the Australian economy is considered to be one of the major financial hubs, which allow small companies to gather the required funding for their operations. The assessment directly evaluates the IPO activities of Australia and analyse three different IPOs, which was conducted during 2013. Moreover, the performance of the IPOs analysed for the asset is compared with the Australian index to determine the level of gains that was provided to the investors. a. IPO activity of the three selected companies, while stating how the manger used the acquired funds:
MANAGING FINANCE 3 The initial public offering conducted by three specific Australian companies is mainly depicted in the above table, which helps in analyzing the different use of funds that was conducted by the managements. Meridian Energy IPO was initiated in October 2013, where the company in 2 days 1,129 million from the equity market within offer price of $1.8. Moreover, the organization was able to acquire the whole funding for which the management initiated the IPO. However, the first day closing price for the organization was at the levels of 0.872 from the initial $1.8, which indicated that the stock lost -51.56% in a single day’s trade. Moreover, the management initiated the public offering for increasing their access to the capital market and commercial Independence from the external debt oversight. However, there was no intention for reducing the debt of the organization (Asx.com.au, 2019). The second public offering that has been analyzed is from Pact Group, where the management initiated the IPO during December of 2013. The organization aimed to raise
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MANAGING FINANCE 4 $648.8 million from the public offering, while it was able to gather all the relevant funding for its expansion plans. Initial offer price was at the levels of $3.8 whereas the closing price for the first day of trade was at the levels of $3.34, which was -12.11% lower than the offer price. Moreover, the management aimed to utilize the acquired funding from the equity market in their working capital (Asx.com.au, 2019). In addition, the management with the IPO also aimed to liquid the shares, improve their capital structure, and initiate their future operations and expansions. Steadfast Group IPO was issued in August 2013, where the management raised 333.7 million from the public offering with an offer price of $1.2. However, the first day closing price of the stock was at the levels of 1.37, which states that the stock price increased by 14.17% in just a single trade. Moreover, the organization initiated the public offering for supporting its acquisition of different companies. In addition, the management also aimed to repay the debt, increase cash and cash equivalent, and reorganize the capital structure of the organization. Being in the insurance sector the organization was able to acquire the required capital for improving their current financial performance (Asx.com.au, 2019). b. Change in cost of equity of the IPO after acquiring the required funds: The calculations conducted in the above provide information about the change in cost of equity for the three different IPOs. Moreover, there is no cost of equity for any of the above firms, before the IPO, as it was their first time. Hence, the estimation of cost of equity before the public offering is considered to be 0%. The calculation of cost of equity for
MANAGING FINANCE 5 Meridian Energy is at the levels of 19.7%, which is due to the low dividends made by the organization to the investors. In addition, the cost of equity for Pact Group is at the levels of 16.24%, which is due to the demands of returns from investors. Furthermore, the calculation also evaluates the cost of capital for Steadfast Group, which is mainly at the levels of 12.9%, as the organization’s overall expected divided is lower in comparison to its share price.Dutta (2016) stated that with the help of cost of equity investors are able to detect the accurate level of returns that needs to be provided by the organization. Henceforth, the analysis directly states that the overall cost of equity of each IPO has increased after the inclusion of the equity capital in their capital structure. c. Critically discussing about the implication of the under-pricing and how it changes fromindustry to industry: There is a direct link between underpricing and initial public offering, which directly allows the investors to obtain abnormal gains from their Investments. The Australian economy is considered to be a financial hub where organizations are able to acquire the required funding from there IPOs. However, the presence of underpricing of shares is still present in maximum of the economy is around the world, as it allows the organization to attract more investors and complete their fundraising activity. The underpricing activity does not vary significantly from industry to industry, as the study conducted in US stated. The study in USA indicated that there is underpricing conducted on majority of the IPOs, as the researcher evaluated 8000 IPOs Conducted in the US economy. The Australia economy is witnessed to have an average 16.6% reduction in their offer price, which is a major proof of the existence of underpricing activity. Moreover, in USA the underpricing levels are at 18%, where each IPO needs to be underpriced for attracting more investors to the offering. IPO like JB-Hi-Fi current producing a return of more than 1800% in
MANAGING FINANCE 6 share value to their investors was also underpriced during their IPO. This underpricing is conducted by the underwriter, who uses the techniques to complete the share buyout without any kind of hassle.Ding (2016) stated the investors investing in the IPO is risking their investments, as the financial report is not widely available, where relevant valuation cannot be conducted to detect its correct valuation. d. Australian IPO activity analysis from 2007 to 2017 and comparing the results with the Australian economy: The information provided in the above table and graph directly evaluates the initial public offering activity of Australian capital market from Year 2014 to Year 2017. The analysis has directly shown that the overall IPO activity of the Australian market declined during the past 10 year, which is due to the slow economic improvements faced by the country. The major reduction of IPO was mainly witnessed in 2008, where a steep decline of -71.2% was witnessed in the Australian capital market, which mainly declined the IPOs from 260 to 75. This decline in the overallMoreover, in 2009 the IPO further declined by -44%, which was due to the continuation of thefinancial crisis that was creating havoc in the capital market. However, in 2008 a sudden hype in IPOs was witness where the IPOs
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MANAGING FINANCE 7 increased from 42 to 99. Nevertheless, in 2012 the IPO activity declined by -51.4%, which was due to the after effect of the financial crisis. Furthermore, after 2012 the overall IPO started to increase, where the total IPO in 2017 increased to 115. Nonetheless, IPO activity of Australia due to the weak economy did not restore to its former glory of 2007 (Dimovski, 2016). e. Comparing the 5 years performance of the IPO with Australian index: The performance of Meridian Energy, Steadfast Group and Pact Group is compared with the performance of ALL ORDINARY INDEX.The performance of industry was exponential during the 5 year revaluation, where the stock provided a return of 148.6% to the investors in share value. Therefore the performance of the organization is relatively higher
MANAGING FINANCE 8 when compared to the Australian index, as the Index only generated 14.7% in 5 years. Similar instance, returns of Pact Group of was also than the index, where the management provided 93.9% returns in share value in comparison to 14.7% returns from the index. However, the performance of Steadfast Group was relevantly low in comparison to other IPOs but higher than the index, where the organization achieved a return on share value of 20.6% (Perera & Kulendran, 2016). f. Comparing the 5 years performance of the IPO with dividends vs Australian index: The overall returns provided by the above IPOs have increased after including the overall dividends that was paid by the management during the past 5 years. The returns of Meridian Energy increased to the level of 181.2%, which is relevantly higher than the ALL
MANAGING FINANCE 9 ORDINARY INDEX. Moreover, the returns of Pact Group reached to the levels of 109.7%, while Steadfast Group provide a return of 33.2% to their investors in share value after their IPOs. Therefore, it is estimated that after the inclusion of the dividends provided by the IPO companiestheiroverallreturnsincreasedandwashigherthantheAustralianindex (Chatalova, How & Verhoeven, 2016). Conclusion: The analysis of the assessment has mainly indicated that IPOs all around the world ae under-priced for attracting more investors, as it helps in acquiring the required funds for operations. In addition, the analysis ofMeridian Energy, Steadfast Group and Pact Group has indicated that the IPOs have provided higher returns to the investors in the long run.
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MANAGING FINANCE 11 Dutta, A. (2016). Reassessing the long-term performance of Indian IPOs.Journal of Statistics and Management Systems,19(1), 141-150. Esfahanipour, A., Goodarzi, M., & Jahanbin, R. (2016). Analysis and forecasting of IPO underpricing.Neural Computing and Applications,27(3), 651-658. Fitza, M., & Dean, T. J. (2016). How much do VCS and underwriters matter? A comparative investigationofventurecapitalistandunderwritereffectsonIPO underpricing.Venture Capital,18(2), 95-114. Mumtaz,M. Z., Smith, Z. A., & Maqsood, A. (2016). An examinationof short-run performance of IPOs using Extreme Bounds Analysis.Estudios de EconomÃa,43(1). Otchere, I., & Vong, A. P. (2016). Venture capitalist participation and the performance of Chinese IPOs.Emerging Markets Review,29, 226-245. Perera, W., & Kulendran, N. (2016). New evidence of short-run underpricing in Australian IPOs.Investment Management and Financial Innovations,13(2), 99-108. Sieradzki, R., & ZasÄ™pa, P. (2016). Underpricing of Private Equity/Venture Capital Backed Ipos. Do they Differ from Other Offers?.Argumenta Oeconomica, (1 (36)), 261-289.