3 February 2012
Susan Easton, senior equity analyst at Gareth Morgan Investments
Video Transcript
Interviewer: Susan, there has been discussion in the media this week about the upcoming Facebook IPO, can you tell us what an IPO is?
Susan: IPO is just a fancy way of describing a company that was private and it’s about to go public and list its shares on the stock exchange. And the acronym actually stands for initial public offering.
Interviewer: Why do organisations like Facebook need to do an IPO?
Susan: Well in particular for Facebook, the owners Mark Zuckerberg and co just want to get rid of their shares, and that’s an easy way of doing it. They can flog it off to somebody else. For other IPOs, it’s usually because current shareholders want to get out of either some or all of their shareholdings. And often existing shareholders don’t have enough cash to raise new equity, so they go to the market to raise more.
Interviewer: Why would people like Mark Zuckerberg want to get rid of their shares?
Susan: Because he’s got a lot of capital tied up in the business and he wants to get his hands on the cash. He has got a block that he can’t do anything with, it’s not cash. So in order to extract himself from the business and make some money out of it he needs to be able to sell to another party. Now one of the best ways of doing that is to do an IPO.
Interviewer: What do organisations do with all the money they raise through an IPO?
Susan: In the case of say a company like Facebook, where the existing shareholders just want to get out, then no, the funds don’t go back into the company, because the cash is being transferred from the new owners to the old owners. But in that circumstance that I mentioned where companies want to raise new capital, let’s say the existing shareholders don’t have deep enough pockets, they want to buy business, want to grow it, usually in acquisitions, new capital expenditure, whatever, then the funds will be ploughed back into the business. So it just depends really.
Interviewer: How do people buy shares in an IPO?
Susan: Well it’s always done through an intermediary, like an investment bank, a share broker, and they offer shares to the public, usually it goes to a raft of institutional shareholders, so that would be somebody like ourselves, with a KiwiSaver scheme who is buying on behalf of the sub owners of the fund. Or it would be offered to retail investors, that’s your typical mums and dads who go out and buy shares directly.
So there’s usually some combination, now if you are a mum and dad investor, it might be a little bit difficult to get shares on certain occasions, particularly if it’s a very popular issue, a ‘hot stock’, unless you have a relationship with an existing share broker, you might miss out. But it varies.
Interviewer: When an international company like Facebook does an IPO, typically would the average Kiwi be able to buy shares in that?
Susan: Well US IPOs are a law unto themselves really, because the US regulations are quite tight, so I don’t think we will see anyone in New Zealand getting Facebook shares in the initial offering. That doesn’t then mean they can’t buy them later on the market, and later become shareholders. And of course that’s all up in the air at the moment exactly how they are going to do it.
Interviewer: Apart from Facebook, are there any big IPOs coming up, either here or overseas?
Susan: Well one of the international ones at the moment that people are talking about is Carlyle Group. They are a private equity manager, they are an asset management firm, they are going public at some stage this year. And of course in New Zealand we have one of our SOEs, Mighty River Power, which we are expecting to list on the stock exchange by the end of the year. But at any given time around the globe there are umpteen IPOs, some of which will be big names and some of which you will never have heard of.