Financial advisors and IPOs

Despite the difficulties facing the country and the impending elections next year our stock market has proven to be as versatile as the other markets in Asia. Even the tragic events that struck the various parts of the Philippines as a result of consecutive tropical storms Ondoy and Pepeng could not dampen investor sentiment. Consequently, our market is 59.85 perent higher versus the same period last year. The market has further been helped along by our largest business groups who, while competing with one another, have launched a spate of acquisitions across such industries as power distribution and mining. Even foreign stock markets are showing an interest in Filipino companies. Three months ago, Manabat Sanagustin and Co., with the Investment House Association of the Philippines ('IHAP') jointly sponsored a forum conducted by the Korea Exchange ('KRX') and Daewoo Securities. The delegation led by Mr. Jung-Suk Jo, KRX Listing Promotions Head for Asia Pacific/Europe paid a courtesy call on our local bourse officials and presented the merits of listing on the KRX to IHAP members. Currently there are very few local companies applying to list, with a single company listed in 2009 and only on the small and medium enterprise board. There is a definite interest in initial public offerings ('IPOs') with a number of companies publicly disclosing plans to apply for listing in 2010 or in 2011. Pursuing a listing can be a daunting task which involves a myriad of activities. Moreover, listing activities can distract a company’s management for an extended period of time from running the business which may ultimately affect the decision to pursue the listing. Companies who decide to pursue a public listing often retain the services of a financial advisor to streamline the process as well as to alleviate some of the burden on management.    

The financial advisor’s job is to assist the company who will be issuing the shares or the “Issuer” in all activities related to the IPO. In the IPO process the advisor assists to identify the value drivers and opportunities to the client and that all inherent risks and mitigating factors have been disclosed to the company’s management. The financial advisor functions as project manager of the listing and begins by understanding the company’s overall business objectives and strategies for them to gain a better understanding of the reasons behind the Issuer’s plan to go public. Generally, companies go public to raise funds through the issuance of new shares (primary offer) for a specific business purpose such as funding an expansion plan or an acquisition. However, there are other reasons that compel a company to list that include debt reduction, creating a liquidity mechanism for the shares or if there is a legal requirement for the company to list a portion of their shares such as in the case of public utilities or certain build operate transfer projects and in some cases even for estate planning. Another reason for listing could be the sale of a partial interest by the majority shareholders (secondary offer). 

During the early stages of the process the financial advisor assesses the Issuer’s readiness to pursue an IPO including identifying potential obstacles to the application process that if left unattended could result in the postponement or even cancellation of the listing altogether. In the course of the listing process there are other parties and advisors that are required including the underwriter(s), legal counsel, and selling agents, among others. The financial advisor is able to assist the Issuer in identifying, evaluating and selecting the other parties and is responsible for the overall coordination of the listing activities. The financial advisor also works closely with the other parties to determine the optimum offer structure. Frequently, a structuring exercise is undertaken with the management of the Issuer, the financial advisor and the underwriters to insure that the value proposition is clear to the investing public. The financial advisor assists the Issuer in reviewing the merits and drawbacks of a particular offering structure and exhausts all possible alternatives. The financial advisor also helps the Issuer in developing a strong understanding of the Philippine Stock Exchange and Securities and Exchange Commission rules for the IPO to make sure that the corporate structure is compliant with regulatory requirements. This would include assisting company management in presenting the company and the offering structure to the Philippine Stock Exchange and answering any questions or concerns they may have about the Issuer and the planned IPO.

Another area that the financial advisor can aid in is the valuation of the company. In most cases, an Issuer has no idea at what price they should be selling shares of their company. Certainly this requires careful consideration, if the shares are sold too cheaply then the company suffers as they are unable to optimize the amount of capital to fund their business activities. If the price is too high then the IPO may not be well received by the market and the share price can decline after the listing date. The financial advisor works closely with the underwriters to develop the optimal range of values for the offer shares. In support of the valuation exercise, the financial advisor can also support the company in preparing and/or reviewing the financial model that will form part of the business plan and/or the valuation.

During the public road shows for the offering the financial advisor is also present to help the issuer address any questions that potential investors as well as the selling agents may have concerning the offer. Perhaps the most significant contribution a financial advisor can provide companies going public is a sense of security that there is someone driving the process to its successful conclusion.

(Jerome Andrew H. Garcia is a Director for Advisory Services of Manabat Sanagustin & Co., CPAs, a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.

The views and opinions expressed herein are those of Jerome Andrew H. Garcia and do not necessarily represent the views and opinions of KPMG in the Philippines. For comments or inquiries, please email [email protected] or [email protected]).