AFIN353 Corporate Finance Assignment: Wattle Health IPO

This report analyzes the Initial Public Offering (IPO) process, using Wattle Health Australia Ltd. as a case study. The report examines the company's objectives for going public, its pricing strategies, and the outcomes of the IPO. It covers motivations for the IPO, the price-setting process, and underwriting arrangements. The report also analyzes the company's capital structure before and after the IPO, the performance of the IPO, and its overall success. Additionally, it discusses pre-IPO considerations. The analysis includes information from the company's prospectus, financial data, and relevant market information to provide a comprehensive overview of the IPO process and its implications for Wattle Health Australia Ltd.

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Corporate Finance Assignment
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Executive summary
This report is too discussed about the process of raising IPO and different challenges associated
with it. Then one Australian company IPO that is Wattle health Australia ltd. has been evaluated
to show its objectives, pricing and outcomes. Next it is described about motivation for IPO, the
price setting process and underwriting arrangement. Next it is analyzed about capital structure
before and after IPO, performance of the IPO, IPO success and about pre-IPO.

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Table of Contents
Introduction......................................................................................................................................3
Motivation for IPO..........................................................................................................................3
Price setting process........................................................................................................................4
Underwriting....................................................................................................................................5
Capital structure before IPO............................................................................................................5
Capital structure after IPO...............................................................................................................6
Offer price........................................................................................................................................7
Performance of the IPO...................................................................................................................8
IPO success......................................................................................................................................9
Pre- IPO...........................................................................................................................................9
Conclusion.......................................................................................................................................9
Reference list.................................................................................................................................11

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Introduction
Initial public offering or IPO is the process of offering shares to the general public by the
private entities. It is a type of borrowing for the company to raise fund from the public.
Companies use IPO to raise money from the public to re-invest in the business which will help
them to grow. When a company wants to grow or is at a matured stage it tries to take the benefit
of public deposits. To initiate IPO in Australia Company must sent a prospectus to the
Australian securities and investment security containing information about the company.
Investing in IPO comes with different risks as the company offer shares at a discounted rate or
by adding value, where the value of the shares may fall or rise. WHA is an Australian based
company provides and develop consumer health products. They are mainly focused on infant
dairy products. Wattle health Australia ltd. main objective is to make capital growth for medium
and long term by initiating IPO (Aggarwal et al., 2016). Their business model is built to achieve
sales at both domestic and commercial. There primary purpose of taking fund is to support the
company expenditures, getting listed in ASX market, pay off all its credits and provide working
capital.
Motivation for IPO
In this tough business economy it is hard for the Wattle health Australia ltd. to get
investment from the public. People have money to invest but they want a good return on their
investment. So in order to get investment from public companies has to apply some basic plan to
motivate public are as follows:
 Demonstrating the profit potential – The best way to attract public for investment is to
show them the possible return on investment.

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 Showing the potential of growth – By using different economic reports and articles a
company can show the evidence of possible future growth of the company which will be
beneficial for the investors (Alstadsæter, Jacob and Michaely 2017).
 Market plans – A proper market planning ensure good profit for a company. It shows the
stability of a business in the market and gain the confidence of an investors.
 Specifying the strength – Showing the strength of the company supported by experience
is beneficial for a company. Investors checks the experience of the company before
investing as they are risking their money.
 Outline the business function – Detail explanation of the business to the investors is
needed to help them for decision making.
 Showing budget – A projected annual or monthly budget is prepared to know the exact
amount from the investors (Atanasov and Black 2015).
Price setting process
IPO price is determined internally by the Wattle health Australia ltd. higher authority.
They decide the best price considering benefit for both investors and the company. Evaluating
the IPO price is a complex and time consuming process. So three methods are used to calculate
the IPO price are as follows:
 Factors influencing the pre-IPO valuation –Most important is to decide the factors that
can influence the price of IPO. Most common factor that can influence are the quality of
stock, organizational set up, current market price of the stock of similar entities, future
potential growth of the company, companies effective business model, customers demand

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for the companies share, market trend and companies achievement and success (Bena and
Li 2014).
 Absolute valuation method – Under this method company estimates the basic value by
analyzing the company fundamentals with market values. Two techniques used under this
method are discounted cash flow which is the net present value of the estimated cash
flow and economic value which calculate the economic factors.
 Relative valuation method – It determines the value of the share by comparing the
financial health of the company. Techniques that are used under this method are price
earnings which is a common evaluation method to determine the share price and value to
EBITDA which measures the total value of the enterprise instead of measuring the value
of the equity (DeAngelo and Roll 2015).
Underwriting
IPO consist of inviting public for shares, determine the value of company and raising
fund by selling shares. The process of issuing and selling stock in IPO is known as underwriting.
It is an expensive and complex process as it requires experts. To underwrite IPO company has to
register themselves as security broker at the security exchange commission. And registration has
to be done before selling any share. A group of bank put their money for funding the IPO. It is a
purchase of shares before the company sales the stock to the public. Then bank will make profit
from the sale of share to the public on the difference they paid for funding the IPO.
Capital structure before IPO
Before IPO Wattle health Australia ltd. may face problems in some area of its operation
which can hamper its day to day function. There is also no requirement of additional reporting

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and disclosure. IPO is also an expensive due to its initial transaction cost which is saved for not
taking IPO (El-Sayed Ebaid 2013). Capital structure of a company shows how the company
finance its operation by using different funds. Capital structure mainly consist of short term debt,
equity, preference share and long term debt. According to the Wattle health Australia limited
annual report of 2016 it can be seen that there is no loan and borrowing but have equity shares
and reserves.
 Risk of future funding – WHA has a very limited internal source to fund itself and
without a proper funding it is not easy to run the business for long period. Without a
proper IPO there is always a risk of future funding.
 Risk in business strategy – A business is always depends upon funds and without which
there is risk of making wrong business decisions. With all funding information it is tough
for the decision makers to make a proper strategies.
Capital structure after IPO
Capital structure is the mixture of long term debt, short term debt, and preference and
equity shares. It refers to the debt-equity ratio which shows the risk of a company. The more
financed firm has a strong capital structure which is the primary source of a company growth.
Wattle health Australia ltd. uses this to expand its business, invest in research and development
by increasing the business opportunity. From the annual report of the Wattle health Australia
limited it can be seen that they have a long term debt with more value of equity shares. It also
consist of accumulated carry forwarded losses. Its reserves also increased after initiating IPO
(Ferran and Ho 2014). Benefits after applying IPO are as follows:

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 Competitive advantage – It get competitive advantage as it produce its own goods in its
own country which provides them advantage then others. With correct IPO it achieved
the standard quality by increasing its brand value among its customers.
 Taxation consideration – After applying appropriate IPO tax treatment has become easy
for the WHA.
Offer price
Offering price of an IPO is the price in which the company wants to sell its share to the
public or investors. It is the value of per share issued for initial public offering. Offering price is
set by the managers which is fair for the investors from all aspects. It is set at such level which
will attract the general public for investment. Offer price is driven by the market to form a new
offer price. Shares at offer price is the first opportunity for the investors to purchase the share. Its
price will keep on increasing with the increase in demand. It’s a beat misleading as investors
don’t get shares at the offer price. Offer price is not limited to stock as it is the price which buyer
is willing to buy and sellers are willing to sell. This price does not stay fixed for long as it will
change as soon as the shares start trading (Foley and Manova 2015).
Offer price is decided after analyzing numerous factors. Company appoints investment banker
who spent lot of time to value the companies’ shares. Methods that banker uses to value the
company shares are financial modeling, comparable company analysis and precedent transaction.
To set a reasonable offer price investment banker uses steps as follows:
 Exploring the IPO process – When the company offer its share to the public in an initial
offering it let the investors to increase the interest of the share of the company.

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 Trading in the open market – Stock is traded in the open market first to give publicity of
the share of a particular company. According to the interest of the investors price is set
like if public are less interested then the price of the share will be decreased and vise-
versa.
 Underprice the IPO – To attract the investors in the initial public offering, price of the
IPO is kept at average range to make the investors happy and get free press (Gippel,
Smith and Zhu 2015).
Performance of the IPO
There are many factors that affect the return on IPO of Wattle health Australia ltd. Some
IPO’s are risky and some are gainful in short term trading. There are few points to consider the
IPO performance are as follows:
 Lock-up – It is a type of agreement which makes a contract between the company and the
underwriter to restrict from selling any shares for a specified period. Period can be ranged
from 3 to 24 month and the minimum period of 90 days.
 Flipping – It is a process of re-selling the IPO stock within few days to earn a quick
profit.
 Tracking stock – Tracking the stocks to know the market condition is important. It help
the company to know the profit of selling stocks separately or as a whole (Roberts and
Whited 2013).
 Long term – IPO attract investors in its initial day as the investors can earn more profit
from it. In the long period IPO price will settle into a steady value.

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IPO success
There are many factors which contribute toward the success of Wattle health Australia
ltd. IPO which are as follows:
 Pricing process – Determining the correct price for the share in which the investors will
be willing to buy the share helps in the success of the IPO.
 Adjustments – Adjusting the company’s goal and structure is important with the
sufficient liquidity (Gaertner 2014).
 Choosing the right marketing time – Taking the opportunity in the market by knowing the
potential threats and competition creates the window for success of IPO.
 Defining principles – Changing principles at regular interval helps the company to take
decisions. Different goals are set for long term gain in IPO.
Pre- IPO
Pre-IPO occurs when the initial public offering is given to a private investors before
selling it in the market. Where private investors are large investment companies who buys the
shares as pre-IPO at below the offered price. In pre-IPO money is raised by the company before
it hit the public. The amount of shares are discounted from the offer price of the IPO. But there is
no confirmation when the company will go public. Pre-IPO is create when there is increase in
interest or demand for IPO (Fracassi 2016).
Conclusion

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Wattle health Australia ltd. raises fund through IPO after analyzing different strategy that
will give the maximum return. IPO can give a direction to the company for growth with some
advantage and disadvantage. With perfect IPO decision future growth of the company depends.
The price of the IPO is set by the top management by applying pre-marketing process. It is tough
to understand the fundamental and technical data of an IPO. So company issues prospectus
which will be easy to understand by the investors. It contains lots of information that an investor
uses to make the decision before investment. So companies uses initial public offering to grow
and to raise the additional capital of the firm. This additional fund can be used to buy some
additional property, stock, paying off the debts and many others.

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Reference list
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DeAngelo, H. and Roll, R., 2015. How stable are corporate capital structures?. The Journal of
Finance, 70(1), pp.373-418.
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Gaertner, F.B., 2014. CEO after‐tax compensation incentives and corporate tax
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