Advantages & disadvantages of listing
In recent times, the Namibian Investment Community has witnessed the listing of various entities on the Namibian Stock Exchange (NSX) with the latest being Bank Windhoek Holdings Limited (2013), Letshego Holdings Namibia (2017) and just last week the Nimbus Infrastructure Ltd made its debut on the local index of the NSX introducing Namibia’s first Capital Pool Company (CPC).
This business phenomena is expected to persist on our “bourse” at the corner of Robert Mugabe Avenue & Jan Jonker with the entrance located at Burg Street due to numerous factors – with the latest one being the much anticipated implementation of the Gazetted Amendment of Regulation 28 of the Regulations to the Pension Fund Act, No. 24 of 1956 which translate in to the immediate lifting and/or increase of Domestic Asset requirements threshold of Financial Institutions, Insurance Companies and Pension Funds from 35% to 40% by January 2018.
The amendment of the aforesaid regulations furthermore set the target of increasing Domestic Asset requirements threshold of Financial Institutions, Insurance Companies and Pension Funds to 42.5% by April 2018 and to 45% by October 2018 respectively. Whilst investors appreciates the mushrooming and listing of various entities – which presents diversified investment portfolios (options) and a large number of domestic ownership opportunities in the economic mainstream on the NSX founded in January 1904, it’s equally sound corporate citizenry to highlight the Pros & Cons applicable to those potential inventors (i.e. institutional and individual).
Arguably, raising and investing capital in viable business projects or undertakings via the local index of the NSX or Africa’s largest Stock Exchange – Johannesburg Stock Exchange (JSE), situated at the corner of Maude Street and Gwen Lane in Sandton, Johannesburg, South Africa or any other international stock market with the intent to harvest good returns on investments (ROI) in future has its own business corollary.
This publication serves to outline those effects by providing snapshots of what institutional entrepreneurs and/ or investors (i.e. individuals) at large are likely to encounter and deal with, subject to their investment strategy and/or philosophies being it medium to long-term. By definition Initial Public Offering (IPO) is the first offering of a company’s securities to the public through the stock market or interchangeably being referred to as a “Bourse”.
More often this platform becomes the ultimate reward for some successful entrepreneurs and taking a company publicly is usually a once-in-a-life-time experience. The process requires a highly qualified team of professionals to pull it off successfully, hence timing and preparation are two critical components for success. Hundreds of thousands of Namibian Dollars can be invested in the process without any certainty that the IPO will be successful.
Interestingly, it is common during changing market conditions to cause underwriters to pull the plug at the eleventh hour, which can be disastrous for a lead entrepreneur’s cash flow and morale.
Therefore, it is of outmost pertinent that a lead entrepreneur or any good standing institution critically analyses and determines whether going for an IPO will yield benefits and/ or whether IPO advantages out weight associated disadvantages as per intricacies listed below. 1. Initial Public Offering Advantages (Pros):
a) Low Cost Growth Capital and Attractive Valuations.A public company has more alternatives for raising capital than a private company. Investors in the private company will discount the value of its equity securities by reason of their “ illiquidity”, that is, the inability to readily sell them for cash. A public company has at least the illusion of liquidity which investors find comforting.
The availability of a public capital alternative also permit the public company a greater leverage in its negotiations with both institutional and individual investors.
b) Increase Personal Wealth A public company offering can enhance the personal net worth of a company’s shareholders. Public- traded stock can be used as collateral to secure loans. The so called “public company multiple” allows shareholders or entrepreneurs to realise greater profit when they sell their shares and when the company sell its shares at higher prices in financings, thus reducing dilution.
c) Company Competitive Position The venture can use its increased available capital as a public company to enhance its competitive position and as a vehicle to realise greater market penetration. Customers like to deal with well-financed businesses. A strong balance sheet is a good marketing tool. Often public companies have stronger balance sheet than other companies.
Availability of Stock as a Proxy for Currency
Stock of publicly traded companies can be used as a proxy for currency in many situations, since it has an available market and easily obtainable valuation. Acquisitions can be made with the stock since publicly traded stock is viewed as currency for mergers and acquisitions.
Establishment of Market Price for future
Offerings The trading price of the public company’s securities can serve as a benchmark for the offer price of a subsequent public or private securities offering. Furthermore, it provides greater access to the capital markets through the possibility of future stock offerings. In a nutshell, the public company’s shares are much more valuable to the recipient, because the recipient knows that he or she will be able to sell them in future.
Ability to take advantage of Market Price Fluctuations
A public company can sell stock when the market is hot and buy stock back when the markets are cold. This can often be an effective and low cost way to raise significant capital.
Increase Personal Prestige
A lead entrepreneur, company’s founders, co- founders and / or managers gain an enormous amount of personal prestige from being associated with a client that goes publicly. Such prestige can be very helpful in recruiting key employees and for the marketing of corporate products and services. The latter is evident in the Namibian Financial Sector.
Liquidity Currency/ Stronger Capital Base
Initial Public Offering enables the entrepreneur to create sufficient liquidity to pay death taxes. The latter can be accomplished through the process of securing more financing, especially when private sources have dried up. The entity becomes potentially successful in attracting potential investors and investment banking firms for the purposes of raising additional funds.
Mergers and Acquisitions
A publicly traded company has greater visibility than many private firms. Businesses and individuals looking for business mergers and acquisitions look first and sometimes only to public companies.
Capital raised through Initial Public Offering is commonly used by firms to reduce debt and provide liquidity. (i.e. the use of short-term liabilities to fund short-term assets). IPO enables a public company to raise capital, to use for various corporate purposes such as working capital, acquisitions, research and development, marketing, and expanding plant and equipment.
Pangwa Gabriel is the Founder & Chairman: Capital Resource Services (Pty) Limited (“CRS”)
He holds an MBA (UFS Business School) SMM (Wits Business School) B-Tech MAR (Pretoria Technikon / Tshwane University of Technology) DMAR, CBS (Polytechnic of Namibia / Namibia University of Science & Technology)
*Catch part 2 of this opinion piece in next week’s edition