Do owners actually receive any money from an IPO ?

[dreamybear]

I have this nagging question at the back of my mind for a long time. I haven't gotten round to it so far because I am not sure how to phrase the question, nevertheless .....

I understand there are potential indirect benefits of a listing to the owners personally, e.g. higher salaries, higher profile, able to pledge shares for a higher loan(due to higher worth of the business), etc.

But do existing owners directly receive a sum of money via an IPO ? There are the 2 sections in IPO prospectus : "CAPITALISATION AND INDEBTEDNESS" and "DILUTION", which basically mention the enlarged share capital(and increase of issued shares) and dilution of NAV to new investors(and the effective cost price to the owners), respectively. By enlarging the share capital via the IPO, the business is worth more, thus increasing the owners' paper wealth by virtue of their stake in the business. But unless the owners sell any of their shares after the IPO, do they actually receive any actual money(or are they in any way cashing out anything) during an IPO process ? 

So for e.g., I am an entrepreneur and manage to build a successful business : If I want immediate partial monetary gratification, I shd be selling off a part of my business to a private investor(corporate entity / person) rather than taking the IPO route ? Furthermore, upon mkt listing, I may even need to fork out my own money to buy some of the stocks, perhaps to support the share price when it undergoes a sharp correction or to shore up investors' confidence. 

BTW, is there any way to use the information in the "DILUTION" section to our advantage as retail investors ?

Thanks in adv to buddies for any explanation rendered !

Sample Reference :
PropNex IPO Prospectus
HRnetgroup IPO Prospectus

[karlmarx]

1) The owner can dilute his/her ownership by enlarging the company's share capital, and sell those shares. Thereby, the proceeds from shares sold will go into the company's coffers.

2) The owner can also dilute his/her ownership by selling his/her shares, without enlarging the share capital. Thereby, the proceeds from the shares sold will go into his/her pocket.

During an IPO, it is usually the case that both types of share sales occur. The company raises some cash to expand, and the owner manages to monetise some of his long time hard work. Obviously, to the investor, option 1 is a better signal than option 2. Ideally, option 2 does not occur at all.

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The part on dilution to NAV sometimes shows you how much premium you are paying to own the shares, compared to the owner. This is only applicable if there is no major restructuring of the company prior to IPO, as it usually masks the owner's actual cost of his/her shares.

If the company is old, the investor should expect to see a high premium against the owner's cost. If the company is new (being restructured), the investor may see a low premium against the owner's cost. So the latter may sometimes mislead the investor into thinking that they are only paying slightly more than the owner to own the shares, compared to the former.

[dreamybear]

Thanks karlmarx - I understand better now.

Are we able to roughly calculate how much the owners have cashed out during the IPO ? Taking hrnetgroup as e.g.
share capital (before IPO) : 48.5m -> assume majority owners 100% interest
share capital (after IPO) : 261m -> majority owners diluted to 75%

Since majority owners reduced(or cashed out) their stake by 25%, they shd receive in physical money = 0.25*$261m - $48.5m = $16.75m ?

Amt raised from IPO : $165.8m*
The 16.75m is paid to them from the amt raised from IPO ?

*https://www.straitstimes.com/business/hrnetgroup-prices-ipo-at-90-cents-a-share

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For companies in general, the owners' effective costs are usually very low, so they wld have made a pile from cashing out / diluting their shares from the IPO. If the owners are people who are not "aggressive", and contented with collecting salaries and maintaining the status quo(assuming company is profitable, has undervalued assets and happily cruizing along), the view of alignment of minority shareholders' interest may not hold, and the company may well be a value trap ?

[karlmarx]

Refer to page 250 to 253 of the prospectus.

Before IPO, Simco has 750m shares out of a total of 767m shares.

After IPO, Simco still has the same 750m shares, out of a total of 1,011m shares.

So Simco did not sell any of their shares in the IPO process, and hence, should not be receiving any proceeds from share sales.

In percentage terms, they now own far less of the company, as the additional shares created (1,011m - 767m) were sold to the public, institutions, and other cornerstone investors. The money raised from sale of these newly created shares went to the company's coffers. As we know by now, some of these proceeds were spent in the purchase of shares in other recruitment companies.

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There is no straight forward answer. It depends on the circumstances relating to the company in question, and the price the investor paid for its shares.

A business is a sand castle on a beach. Sitting still and not tending to the sand castle means that it will deteriorate, and eventually be washed away. If nothing is done to reverse the deterioration, or release value to shareholders -- by say, selling the sand castle to someone else -- whatever value the shareholders own will also disappear into the sea.

So if an investor bought an company that is today worth a dollar -- but is deteriorating in value by 10% a year -- for only 80 cents, there is some value of 20 cents 'earned' today. But if that 20 cents value is not somehow monetised, and the company continues to deteriorate, then the 20 cents may well disappear. Of course, if you bought the company for 50 cents instead, then you'll have more time to pray and hope that the management does something to monetise its value.

Opmi are mere passengers on a ship. Every ship is different, and so is every captain. Some are contend with what they have. Some are hungry and able. Some are content and/or incompetent, vis-a-vis their competitors. Some feel an obligation to take care of each of their passengers, some only care for themselves, especially during an emergency. A lousy captain will run your ship aground, even if it is equipped with all the latest navigational and autopilot aids.

Management has the most pronounced effect on shareholder value, but is the most difficult to assess.

[donmihaihai]

Increase and dilute in NAV for any new share issuance can be and must be look at using math.

eg.
Co Bear has equity of $10。
Total number of shares 2.
NAV per share = 10/2 = $5
No. of shareholder =1. Call it shareholder A.

Co. Bear needs money and issue 1 new share @ $10 to shareholder B.
Total number of share = 2 + 1 = 3
Total equity = $10 + $10 = $20.
NAV per share = $20/3 = $6.67

For shareholder A = NAV per share increased by $1.67
For shareholder B = NAV per share diluted by $3.33

If the new share is issued at $2.50, then it will be shareholder A being diluted while shareholder B gain in NAV.

[dreamybear]

Thanks karlmarx(btw, great analogy using the ship passengers/captain) and donmihaihai(thx also for using Co Bear !) for your coaching; I think I am getting the picture now.  

I referred to Propnex pg 84 and indeed, in this case, there are some changes in shareholdings b4 and after IPO, e.g. Alan Lim's direct interest from 37m to 14m, while Kelvin Fong's 30m to 27m.

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While owners hv a variety of reasons to "cash out" during IPO, I can't help but think one of the main reasons is they feel that the share is overvalued or are not confident in the business' prospects in maintaining that kind of valuation. I am thinking along the lines of taking investors as an e.g., sometimes we wld sell a fair valued stock to buy another undervalued stock. Owners are humans too, if the shares are fairly/under valued, unless there is a dire need, why wld they want to sell off part of their holdings ? For e.g. for a company with gd prospects, if the owner cannot get a good price for IPO, he/she may be inclined to think of another alternatives or shelve the IPO altogether.

Just thinking ...

if a company manages to IPO at a very high valuation with the help of super investment bankers, and
(1) owners sell quite a chunk of their shares, 
(2) the share price gets depressed after listing for whatever reasons (even though company is profitable),
the owners can easily buy back shares from the open mkt or make a low ball offer to take it private. It becomes a great short !

And also, in both cases(IPO vs take private), investment bankers are probably well remunerated -> investment banks are a great bizness in capitalism.

This reminds me of another way to make money, become a barbarian waiting at the gates(story of KKR) ...

[karlmarx]

if a company manages to IPO at a very high valuation with the help of super investment bankers, and
(1) owners sell quite a chunk of their shares, 
(2) the share price gets depressed after listing for whatever reasons (even though company is profitable),
the owners can easily buy back shares from the open mkt or make a low ball offer to take it private. It becomes a great short !

And also, in both cases(IPO vs take private), investment bankers are probably well remunerated -> investment banks are a great bizness in capitalism.

This reminds me of another way to make money, become a barbarian waiting at the gates(story of KKR) ...

This seldom happens.

Owners who are serious about the long-term implications of an IPO, such as raising the company's profile, and occasionally tapping the financial markets to fund expansion, will probably not buy back the company even after the share price has fallen.

For owners who are using the IPO as a vehicle for 'cashing out,' they are more likely to neglect the business, causing it to deteriorate, and hence will probably not want to buy back the shares even when they have fallen.

A good book for understanding IPOs: 
https://www.goodreads.com/book/show/3935...eYO&rank=3

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In general, fewer companies have been coming onto the public markets compared to the past decades. And it is a global, not local, phenomenon. The fees 'barbarians' receive for a successful IPO has also shrunk from say 7% to 3% (I think). So a lot of these 'barbarian firms' have been downsizing. It was, of course, good while it lasted.

[specuvestor]

Actually it does happen. Issue is it happens over YEARS not so simple as step 1 , 2 , repeat. OPMI generally won't have that patience or capacity for pain cause the owner can extract other value besides share price.

Pacific Offshore (POSH SP) is a good recent textbook case, with relative short timeframe

[karlmarx]

And also Indofood Agri. But Salim didn't succeed. Though he managed to buy a lot more of it. But from IPO to privatisation offer, I think it was more than 10 years.

I think Vard is also another example with relatively short timeframe.

[specuvestor]

Just to digress a bit: Vard privatisation was quite different cause the original owner Korean STX was in trouble. In fact it shoved the Brazilian lemon into STX OSV (Vard’s previous name) to try to save itself. So it was privatised not by the owner or related parties as part of the game plan.

And also Indofood Agri. But Salim didn't succeed. Though he managed to buy a lot more of it. But from IPO to privatisation offer, I think it was more than 10 years.

I think Vard is also another example with relatively short timeframe.