IPO and secondary offering: I

I have written an article talking about why Chinese companies come to list in NYSE or Nasdaq a while ago. This is a topic warrants more than one article, amid the VISA filing for IPO and recent controversy of Chinese companies (Ping’an and Pu Fa) tried to do secondary in Shanghai. So let me talk about the reasons why companies go to capital market for money.

I remember Ken Fisher talked about the use of debt or stock for companies in terms of raising money, in his book “Only 3 questions that count“. To sum it up, a company will always look for a better way to finance its operation/growth, if the debt (borrow from banks) is available and cheap, they will do it. On the other hand, they will go with issusing stocks. He further explains why maturing companies (with low PE) finds borrowing is cheaper, and growth companies finds issuing stocks is cheaper.

China Ping an insurance IPO pic
(Picture above: CEO of China Ping’an insurance at IPO media event)

But the real world is more complicated. There are many reasons a company went to public:

1) The company needs to raise money for operation and further growth (including acquisition);

2) Private euiqty, VC, or other owners need to cash out, they need to move on;

3) The company need to reach to broader audience, a brand will be enhanced through public listing because they will have more shareholders and more press coverage, vice versa;

4) Stock options (to keep and attract talent) will be meaningful for option holders, and thus motivate key people to work harder.

These are all legimate reasons for company to go public, after all, the over worked founders and management deserve a carribean vacation, and a beach house, if they really contributed to the company. In the following let me use two cases to illustrate the point.

Case Study
From its S1 prospectus, VISA listed the proposed use of the (IPO) proceed:
“We intend to deposit $3.0 billion into an escrow account from which settlements of, or judgments in, the covered litigation described under “Business—Retrospective Responsibility Plan” will be payable.

Following the completion of this offering, we intend to use $10.2 billion of the net proceeds to redeem 123,216,659 shares of class B common stock and 143,037,934 shares of class C common stock, assuming no exercise of the underwriters’ option to purchase additional shares.

We will use the balance of net proceeds for general corporate purposes.”

So let me put it in plain English:

1) They will use $3.0 billion to settle the lawsuits. Both VISA and MasterCard have been sued by competitor and consumers lately;

2) They will use $10.2 billion to buy the stocks currently hold by big banks such as JP Morgan. In other words, the item 2) in “reasons a company went to public” mentioned above;

3) General corporate purpose, this is a common word used by a company.

Let’s look at another case, the longtop financial technonolgy. Again from its F1 prospectus.

1) approximately $25 million to acquire an office building in Xiamen; (my comment) buy a real estate, sounds a bit strange because the company is in IT/software business, but still can be counted as fund for operation

2) approximately $10 to $20 million for acquisitions of IT service companies, including approximately $3.4 million in cash and potentially an additional $2.6 million in cash earn-out payment in connection with the acquisition of FEnet. …(my comment) acquisition

3) approximately $30 million to pay a previously declared dividend. See “Dividend Policy;” (my comment) the current owners want to get more

4) the balance of the proceeds for general corporate purposes. dido…

Overall I am not impressed by either VISA or Longtop’s use of proceed. It seems more and more like a Chinese word “Quan Qian”, which I will talked more later.

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