ON FEBRUARY 21, 2005, Mayberry Investments Limited opened the
private placement segment of their Initial Public Offering, presenting Jamaicans with another avenue to invest their money. Those not invited to this private offering waited anxiously for the announcement that the offer was now available to the general public. But what does all this mean?
Let us start at the beginning. An initial public offer popularly known as an IPO is the first sale of a company's stock to the public. For many investors, this represents the opportunity to make quick, substantial gains on their money.
But an IPO should not be entered into lightly, as with all stock investments the fundamentals of the company 'going public' should be scrutinised before any investment is made.
BENEFITS OF AN IPO
The Jamaica Stock Exchange (JSE) has been actively
encouraging private Jamaican companies to 'go public'. Additionally, the JSE is
aggressively rolling out its public educational initiative to sensitise Jamaicans about the stock market and its benefits.
From a company's perspective, an IPO presents the opportunity for more affordable financing than borrowing through corporate paper in the money market or a loan from a bank. This money can then be used to fund expansion, improve operational activities, explore additional products and other similar activities, in the hopes of making the company more competitive and profitable. Moreover, by listing publicly, the company enjoys the possibility of appreciation of the share price and hence the overall value of the company.
For the investor, an IPO is an avenue to make potential gains on their investments. If the company continues to do well, they benefit from even further capital appreciation and sometimes from dividend payouts, bonus share offers and other positive corporate actions.
The country also benefits. As more companies list on the JSE and continue to do well, interest is generated in the stock market as this increases the choices in which investors may partake. The stock market encourages savings and investments, pulling excess liquidity from the economy. This in turn helps to reduce the money chasing foreign exchange, goods and services and as a result, plays a part
in minimising inflation. Additionally, a company going public means that they are
obligated to maintain a higher level of disclosure regarding their operations, especially their financials. This allows for greater regulatory monitoring and protecting of shareholders' investments.
IPOS IN JAMAICA
With money market returns just two or three points above the year to date inflation rate, investors hungry for double-digit returns are willing to accept more risk in order to beef up the returns on their investment portfolio.
IPOs in Jamaica have been few and far between. In 2003, both Jamaica Money Market Brokers Ltd. (JMMB) and Capital and Credit Merchant Bank Ltd. (CCMB) listed on the Jamaica Stock Exchange. Before that, the last listing was Kingston Wharves in 1995. Both JMMB and CCMB did well, debuting at $4.15 and $5.00 respectively, doubling in price around a year after listing. This success has generated overwhelming interest in the latest share offer.
In short, investors are thirsty.
But be aware, not all IPOs are created equal. Many investors lost their life savings after
investing in technology upstarts in the dotcom craze.
INVESTOR CONSIDERATIONS
When considering an IPO, do not follow the hype of the crowd; look at the fundamentals of the company its operations, future plans, financials. As a rule of thumb, invest only if the company 'going public' is an excellent business with great growth prospects for the long term. Follow the example of Warren Buffett, who became one of the world's richest men through careful investments, "Buy a share of stock as though you were buying the whole company".
So how do you determine if the company is an excellent business? We will examine the criteria for evaluating an IPO and the characteristics of an excellent business in this column next week.
We welcome your comments at info@ncbcapitalmarkets.com or 1-888-4WEALTH.
