How IPO Performance is Dictated by These Factors
Not all Initial Public Offerings (IPOs) are likely to make money for its investors. It is very important as an investor in the IPO market to analyze and predict IPO performance. The company usually gives a detailed explain its offer of sale of shares by a document known as S-1. This document is made obtainable to the public only after it is approved by the Securities Exchange Commission (SEC).
This document is more commonly known as the Company Prospectus or the Red Herring Prospectus. The document is the repository of everything needed to estimate IPO performance. The Prospectus lists down all the factors which are likely to affect IPO performance including the risk factors perceived by the Management. One of the best ways to estimate IPO performance is to focus on four basic factors namely Underwriters to the Issue, Quality of Management, Use of IPO Proceeds and Expected Earnings.
“Use of IPO Proceeds” section elaborates the reasons as to why the company is seeking funds from the public. The section explains within what time duration and how the company shall make use of the funds garnered by the IPO. You must prefer companies which are going to use the funds for business acquisitions, capacity expansions and investment into R&D. Companies which plan to retire debt or make use of the funds collected from the public for working capital requirements are likely to find less favors with the investing community.
“Management” section talks about the background of the promoters and top Management of the company including their academics and experience credentials. Good quality corporate governance has a lot to do with the quality of management. Check the composition of the Board of directors of the company to estimate how independent is the board and does it includes stalwarts from the industry.
“Future Earnings” section provides forward looking statements to provide expected future growth in sales and profitability. The earnings section should be read in conjunction with the section on “Management’s Discussion and examination of Financial Condition and Results of Operations”
“Underwriters to the Issue” – The Company offers its shares to the public by entering into a contract with one or more underwriters. By and large good quality investment bankers like Goldman Sachs, J.P. Morgan etc like to get themselves associated as underwriters only with issues which merit their attention and have a high probability to succeed.
The meaningful to a successful IPO investor lies in his ability to correctly predict IPO performance and extract and analyze information from tons of data contained in the Company Prospectus.