Category Archives: IPO
It is a common occurrence to hear of private equity buyouts these days. While some would like to place it entirely in a negative light, it can be beneficial for the business. Private Equity Firms such as Effi Enterprises may perform these types of financial activities to help recreate the business. There was a large number of leveraged buyouts (LBOs) that occurred in the 80s. It’s interesting to find out what triggered all of these buyouts and what the influencing factors were for their beginning and why they ended. It is also interesting to know the happenings after the companies were purchased. And what about the buyout firms; did firms like Effi Enterprises make any money?
At the very peak of the 1980s leveraged buyouts was Kohlberg Kravis Roberts’ purchase of RJR Nabisco. This buyout became the subject of a book written by two Wall Street Journal reporters, “Barbarians at the Gate.” It became a #1 bestseller in the New York Times. Later it was made into an HBO movie and was called by the same name.
The movie, Barbarians at the Gate retells the events that occurred during the largest leveraged buyout ever. James Garner plays RJR Nabisco’s Chief Executive Officer, F. Ross Johnson who is trying to buy out his own company. Much of the movie surrounds the power struggle between a Wall Street investment banker Henry Kravis and Johnson. Kravis wants to make Johnson take Nabisco over on his own.
It is a story of betrayal, high stakes and power struggles but told with great flair. It is well balanced with some lightheartedness and even playful tones at times. The movie gives us the chance to see a very different point of view of the behind the scenes goings on of leveraged buyouts. Rather than viewing these types of high profile financial transactions as an outsider with little understanding to what is actually going on in the company Barbarians at the Gate allows us to see it from the perspective of an insider. And in this case not just someone inside the company, but the man who sits at the top, the CEO.
It is sprinkled with dry humor, quite a bit of tension and subtlety. It’s a general look at a huge corporate game in which the losers all get $23 million – after taxes of course. The pace of the movie is great and this picks up nicely closer to the end of the movie as the story is building up to the climax. As the characters are all rushing around the audience is caught up in the energy of the moment, whether you already know how the story ends or not.
Screenwriter Larry Gelbart does an exceptional job of making F. Ross Johnson the protagonist. This is a difficult thing to do since he is a rich man who is deviously trying to get ahead of the game, this type of financial slight of hand that is despised by most. Mr. Gelbart is able to make Johnson into a rather likeable character in spite of his dealings. Of course he is made out to be someone who cares immensely for the company and the people and less for the money to be made. And Garner does a great job at playing a character which is mixed with humanity, greed, incompetence and good-naturedness. Kravis, played by Jonathan Pryce makes him out as more of a villain.
These were some very strong and captivating performances which opened up the world of F. Ross Johnson making it visible to the public eye. His morals are very much what is expected from the super wealthy are warped and the movie has several scenes which play this out nicely. The movie does a great job of presenting how he manages and even mismanages the buyout. It’s a high stakes game played between Kravis and Johnson and has all the drama that entails. And even though the vast majority despises such things as financial fakery that ends up with literally thousands of jobs lost, Barbarians at the Gate shares a perspective that is nothing less than thought provoking and entertaining.
Hedge Funds are types of partnership investment opportunities. Sometimes these are formed as a limited partnership or a limited liability company just in case the company goes under or bankrupt, creditors will not be able to try to get more money from the investors than the amounts they contributed to the hedge fund. These are a very risky type of investment which many shy away from while others flock to it. Some feel that the greater the risk the higher the return can be in the end. A hedge fund manager will use money that has been deposited with his company by investor and use it to invest in another company looking for a profitable return on the funds.
The main purpose of a hedge fund is to capitalize on the market and be able to make money whether the market is increasing or decreasing. This type of private investing is a way to sort of outperform the market. This type of private investing is not like mutual funds which are run by large public corporations; therefore they are not regulated by entities such as the Securities and Exchange Commission (SEC). This lack of regulations is what makes them be so risky, but is also one thing that makes them more attractive to investors. This is just one type of private investing opportunities which companies such as Effi Enterprises helps locate for start up businesses or struggling companies.
What does a manager do?
Managers of a hedge fund get compensated by earning a percentage of the returns. This is more appealing to many investors since they do not get just a “fee” as a return on their investment. The managers stand to make a lot more profit since the compensation structure can yield a return that is above market value. Without the standard types of regulations, hedge funds can yield a very high return; even though much of the investment is based on speculative results initially. Managers are excellent at using derivatives, like futures contracts or options. These allow a manager to bring in a profit whether or not the stock market goes up or down. Many times they have the option of selling the stocks short which basically means they can use a small amount of money as leverage and remain in control of large quantities of commodities or stocks. And they can select a particular time frame in which they will pay out. This means that they can use timing along with leverage to make a huge return if they correctly predict if the market is going to rise or fall.
New Regulations on Hedge Funds
Recently, there were some new regulations put into place regarding hedge funds. If the hedge fund is valued over $150 million it must be registered with the SEC. The Dodd-Frank Wall Street Reform Act which was enacted in 2010 set up a Financial Stability Oversight Council which watches for this type of private investing that begins to grow too large. Once it is deemed that they are “too large to fail” the Council may recommend the regulating of these funds by the Federal Reserve. The Dodd-Frank Act also set limits for how much a bank can invest in a hedge fund. Hedge funds can only be used by banks on behalf of customers and not simply to boost the corporate profits of the bank.
What happens if the investment is lost?
The hedge fund is very risky for investors. If the investment pays off everyone gets paid, but what happens if the fund loses money? Does the manager still get paid? Absolutely not; they will not get paid if there is a loss. The manager is somewhat protected while it is the investor that stands to lose. However this type of investment is protected from fraudulent activity but many feel that there are not enough regulations in place that can help protect the private investor.
There was a day when any kind of IPO investment in the technological world was all but guaranteed a huge profit. Some investors grabbed up public stock in companies like VA Linux and had some great first day gains. Those who invested and then sold did very well and made investing look like a very easy process. But investors were disappointed in the long run as they watched values plummet.
It is important to realize that there is no investment that is a guaranteed, sure thing. There will always be risks associated with investing. Companies like Effi Enterprises are aware of the risk factors and carefully consider the high tech companies that they offer venture capital or private investing options to. The biggest lesson many investors have learned is that the IPO market leveled out and there are not the same extreme gains to be had simply from flipping stocks. IPO’s have a huge set of very unique risks which makes them different from trading in average stock. A good example right now is the Facebook IPO. Many people grabbed up public shares and invested in the top social networking company. Stocks have risen somewhat from their initial drop but they are still about 13 percent down from where they were a short time ago. That’s not actually a bad drop compared to many companies such as Zeltiq Aesthetics who is sitting on a 65 percent decline from its initial IPO price.
People thought they could buy up some Facebook shares and watch the prices soar immediately. Basically, they took a risk and lost. IPO’s are not the best option for most investors. When a company goes public one of the main risk factors is that there has not been a trading history and so there are no analytical reports to examine. Trying to obtain information on a company that is going public is going to be difficult. Most of the time companies have traded publically and so there are lots of analysts which have done their homework. These reports can at least reveal some of the problems they have encountered.
Purpose of an Underwriter
Many times a company which is going public does not have a strong underwriter. This of course, does not mean that investment banks never produce a dud, but generally quality brokerages will be bringing only quality companies public. It is very risky to choose companies who are represented by smaller brokerages because they are many times willing to underwrite any company at all. A larger investment firm can be more selective about which companies it underwrites than a small underwriter can. However, the smaller broker can make it a lot easier for private investing since it’s much easier to purchase IPO shares.
Read the Prospectus
It is important to read a company’s prospectus. But keep in mind that this is not done by an outside party, it is written from within the company so it is not necessarily as reliable as a third party analysis. You will need to note the risks and opportunities as they are presented by the company. You will want to know why they are going IPO. If the money raised by IPO is going to repay loans or to buy equity from private investing, stay clear. However, if it is going toward marketing, expansions or research it is usually a good sign.
This does not mean that IPOs are all bad. There have been many success stories over the years. There are some very successful companies that go public every single month, however, it can be very difficult to sift through it all and find the investment opportunities with the most potential. Efraim Landa works with companies who are going public to help ensure each party’s success.
Effi Enterprises was founded by Efraim Landa for the purpose of encouraging growth of emerging companies. One of the ways they achieve this is through IPOs. Effi Enterprises offer their expertise in this area as well as many other financial components of establishing a successful business.
Definition of IPO
When an investment banking firm takes a company public through raising investments, the transaction is called an Initial Public Offering, or IPO. Investment bankers are cautious about representing private companies and need to be assured that there is an adequate amount of public interest before proceeding. Their own fees will be based on the amount of capital the transaction will raise so they want to be certain it is worth opening the company up for private investing.
Advantages of an IPO
There are a wide variety of benefits that can be achieved through an Initial Public Offering. There is significant access granted to the investment capital and it fosters credibility because of the supporting interest of an investment banking firm. It will also provide the company, as well as the public investors with professional advice during the time of the transaction; and research reports and analyst coverage will be generated to ensure that the public remains informed. These will provide a strong base of public information that can be beneficial to the company later on. They can become excellent PR sources that help inform future investors about the health of the company.
Disadvantages of an IPO
There can be a few disadvantages of an IPO. For instance, it is more costly than a reverse merger transaction or a direct public offering. There will also be more need to form ways of keeping the investors informed such as having the additional responsibility of managing meetings or setting up conference calls. And the success of an IPO is largely dependent up on the investment banker as well as the current condition of the market.
Are there any costs for an IPO?
There are five basic fees that will be associated with an IPO. There are accounting and legal fees that will have to be covered. A professional adviser will assess a fee. And there are filing fees as well as financing fees that will be assessed. The fees associated with accounting, legalities, filing and the professional advisor will depend largely on the complexity and size of the transactions. It will typically cost in the thousands for an IPO, but it can cost up into the millions. The financing fees which will be charged will be based primarily on the funding that is raised through the investment banking firm.
Tips for Investing in IPOs
It is best to maintain a long term focus than to hope for a quick turnaround on investments. But even when staying focused on long term prospects a good IPO is difficult to find. Every type of investment has particular risks that are associated with it but IPOs are very different than investing in average stock. There are some things to keep in mind if an IPO is the desired choice. Firstly, you will need to do some research on the company, its financing, competitors and its industry health. It may be difficult at first to locate information, especially research data, since they have not been among public companies which are covered by analysts.
It is essential to read the prospectus. This will lay out the risks as well as opportunities of the company along with financial proposals for the money brought in through the IPO. Look for finances which are being distributed to fund research, expansions or marketing. Read objectively considering if the prospectus gives a balanced outlook concerning projections and financial earnings outcomes.
Effraim Landais very familiar with helping companies with an IPO. His own company Effi Enterprises works with companies to explore and obtain various types of financial investments. They specialize in helping emerging companies handle revenue as they continue to experience growth. One sign of marked business growth is when a company is going to go public. Something Facebook recently announced they would be doing with their stocks.
Facebook ‘s IPO
One of the questions that are posed to Effi Enterprises concerns when it’s time to go public. Companies are generally looking for a magic number to that then qualifies the private company for public investments. There really is no set number for revenue or profit that defines the “right” time to go public. Going public in actuality should be when the company is not desperate for finances. The company is no longer just trying to survive but is instead seeking funding to finance expansions or growth. Some are looking for public shares to help the company make acquisitions. Facebook is in the perfect spot to go public by this criterion.
In 2012, Facebook reported a 45% increase in revenue in the first quarter. In comparison, Google reported only a 22% increase in the same time frame. Going public could mean somewhere around $100 billion. Their goal is to raise $5 billion in the IPO, this is with the total valuation of around$100 million.
Going public may be a favorable way to generate revenue. There is no doubt that Facebook has value in the public eye. The question is if key investors will see the same value. When you look at the numbers it is astounding. Facebook will have approximately one tenth of the world’s population signed up. It is likely that no other business has had such a huge audience. Facebook already controls over a quarter of all online advertisements. That’s equal to about one sixth of the ad revenue generated in the United States. With numbers like that, why would investors in the private sector be hesitant to contribute? With its track record it is nearly a guaranteed successful venture.
Business analysts will state that while the ads are the biggest asset, they may very well also be their biggest risk factor. The trouble from here is continuing growth in this arena. The larger a company becomes the more difficult it can be to continue and sustain such monumental growth. Can they continue to build ad campaigns and keep their audience engaged? What about the possibility of overwhelming the users? These are real risks that Facebook must address to reduce the risk of losing rather than gaining. Facebook will need to convince potential investors that they can continue monetizing the millions of users.
What Facebook Says About Going Public With Shares
Facebook plans to offer 180,000,000 shares to the public. These are all Class A Common stock and in addition shareholders are offering 157,415,352. This is their IPO- initial public offering. Previously there has been no public market for Class A common stock. The IPO price should be set from $28 to $35 for each share.