Explaining Share Offers: IPO, Private Placement, Rights Issue and Offer for Subscription

The bank and insurance sectors' consolidation processes threw up a lot of new share issue activities which undisputedly brought more attention to the stock market. Those processes also brought out names from the share-issue lexicology that could leave the average person wondering what the differences are and more importantly, where to pitch in. This article seeks to clarify the share issue options and the implications of each, to enable you decide more confidently, next time, whether a particular offer on the table is good for you.

Offers Are Scrutinised and Approved By SEC
Share offers are made when a company wants to raise more capital, usually to strengthen or expand its operation. They do this by inviting more people to become members by contributing to the capital of the company. Mind you, a company doesn't just wake up to throw such offers at the public. The market is regulated and there is the Securities and Exchange Commission (SEC) which oversees capital market operations and which grants approval to companies before they can invite the public to by shares. No doubt, such company must meet certain criteria before this approval is granted. Simply put, the SEC scrutinises requests from companies and if satisfied about what they propose: the volume of money they require, what they intend to do with it, the price at which the offer is being made, every other factor intended to protect the innocent investing public, will approve the offer. While the people at SEC would have done their best to ensure that the offer is sound, you still have a lot of personal responsibility, as an investor, to evaluate and ensure it justifies staking your precious money. The offer could be in any or a combination of these categories:

• Initial Public Offering (IPO)
  This refers to a companies first-ever sale of shares to the public. It is the first offer a company makes to the public to raise money through a stock exchange. Take ABC Transport's offer in 2006. Prior to that IPO, the company had not been to the Nigerian Stock Exchange to raise money, previously. An IPO will therefore necessarily come from a previously private company, now ready to go public by allowing other investors to introduce capital and become members.
  
  Cons: The company bringing such offer is hardly well-known, in the sense that, as a previously private company, it had no obligation to publish its accounts or meet any of the corporate governance obligations of public companies. In terms of market trading, there is no track record to rely on to evaluate and project. Various other parameters are absent: for instance, no dividend payment history to judge dividend policy. The implication of all this: an IPO inherently is a high-risk investment, largely a shot into the dark. Take Onwuka High-Tec Plc - dead as soon as the public had bought into the company through its IPO.
  
  Pros: The flip side is also possible. Not having a track record and other factors could lead to a depressed pricing, meaning that significant appreciation can occur, post-offer. The IPO could therefore represent a hidden investment opportunity. Associated Bus Transport IPO came to the market at N1.50. As at 18th July, 2007, that stock had risen to N3.88. That's a 159% growth in . If you don't get that clearly, it just means that a N1 million investment would have grown in value to N2.59 million. Then consider some of the banks that came to the market with IPOs during the banks consolidation programme. Many of the investments have so far proved exceedingly successful.
  
  It all boils down to vigorous scrutiny. What is the business behind the offer? Do the fundamentals look solid? Unless you are speculating on price, you will need to be satisfied about the business you are investing in. Otherwise, let the IPO go, knowing that if the company proves successful, you can always still invest by buying in the secondary market.
• Private Placement
  This is another avenue for a company to raise capital. In private placement, the offer is privately presented to a limited number of investors, as opposed to an open offer to the public. Usually, this is targeted at well-heeled investors, including fund managers and institutional investors. Overall, this is more flexible for the issuing company since the cost of marketing and administering the offer is obviously lower. It also offers a relatively quiet way of testing the market the first time out.
  
  Pros: If you do get invited as an investor, it obviously means you match the profile of investors the offer is targeting, which is good for you. Considering that they are usually quality investors, the offer is likely to meet a standard that should appeal to such savvy investors. A company will not go for this limited option if it has no inherent investment appeal to attract enough funds from the group. The pricing may also reflect the savings in issue costs, giving some benefit to the investors.
  
  Cons: When used by a new entrant, the challenge of evaluation, given the absence of track record and previous public information on its operation, will have to be dealt with.
  
  As with any investment, you still have the responsibility to ensure you understand the company and its business and that the prospects meet your expectation.

On Record

Every day I get up and look through the Forbes list of the richest people in America. If I'm not there, I go to work. Robert Orben, American Writer

• Public Offer
  This is obviously the king of all offers, the one for everybody and where you most likely have a good basis for evaluation. That it is not an IPO means the company is already listed and traded on the stock exchange. That readily implies that there is a market history and its operational results are usually made available to the public. A public offer is an offer of shares to the public at large, meaning that any interested investor can buy into the company.
  
  Pros: Usually more screened by the regulators since the general public is expected to invest. Much more is known about the company and its antecedents, improving your investment appraisal beyond figures churned out in a prospectus. A public offer is hardly a quiet affair, assuring that you cannot easily be conned into a phoney offer, a minor risk with a private placement.
  
  Cons: Nothing special, except that you have to evaluate an offer to decide if you want to be part of it.
  
• Rights Issue
  This is close to a public offer, only with the limitation that only existing shareholders of the company can buy. Here, a company wants to raise money exclusively from its existing owners. This may be designed to avoid diluting ownership or to keep benefits 'within the family'. Usually, such offers are at a discount (below the current market price), which gives the shareholders an immediate benefit. It must be stated though, that rights are now traded (sold and bought), meaning that the existing shareholders can still sell their rights to persons not previously shareholders. Rights are offered to shareholders in a certain proportion to what they already own (examples 1:2; 1:5) and each shareholders' entitlement is advised him through a rights circular. It's common to have a hybrid offer - a combination of pubic offer and rights issue, as in the case of First Bank's May, 2007 offer.
  
  Pros: Most times, there is a pricing benefit with rights issues being made at a discount. Besides, the rights beneficiary is already a shareholder and presumably familiar and comfortable with the company. It's therefore easier to evaluate the offer. Also, a rights issuer is, by implication, already a public company subject to higher regulatory scrutiny. A rights issue immediately gives a benefit since you can sell your rights even when, for any reason, you cannot invest in the current offer.
  
  Cons: No special challenge, since you can opt out and still sell your rights.
  

So, the share investment opportunities may come in these various forms. These options all fall into what is referred to as the primary share market. None should be strange now. When they arise, assess them and see if they make good investment for you. Always know that if you can't buy in a primary offer, you can always buy the same stock in the secondary market.

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