Founders must not shortchange investors

Public listings should fund expansion rather than become a cashout opportunity

“When they lose money, they will not want to touch your stocks anymore.”

KUCHING: Founders should leave room for investors to benefit from an IPO rather than push for the highest possible valuation or treat a listing as an opportunity to cash out.

M&A Securities’ Head of Corporate Finance, Gary Ting said during an episode of ‘Beyond the Prospectus: IPO Is Not a Lottery Ticket’ by Do More and Aurum Digital that advisers generally encouraged companies to price their IPOs at levels that offered investors some potential upside after listing.

“Usually when we talk about pricing the IPO, we always advise the client to give a little bit of upside to the investors. Because you don’t go and maximise the value, right? This is our advice usually,” he said.

Ting said founders should view an IPO as the beginning of a company’s next stage of growth rather than the end of the journey.

“A lot of founders think that going for an IPO is like striking a lottery. They never look long term,” he said.

He cited Inari Amertron as an example, noting that the company had a market capitalisation of RM138 million when it was listed before subsequently reaching about RM11 billion.

“RM138 million market cap, that’s not the end of the journey. You should look at RM11 billion,” he said.

Ting warned that pricing an IPO too aggressively could leave little room for the share price to appreciate and expose incoming investors to losses.

“If it’s so expensive to the max, the only way for the share price to move is to move down. And your investors will get hurt. And when they lose money, they will not want to touch your stocks anymore. So, you always leave some upside for your investors,” he said.

He said advisers also had to guard against IPO structures that allowed founders to cash out excessively while leaving insufficient funds in the listed company.

While it could be difficult to determine a founder’s intentions beforehand, Ting said the structure of the offering provided an important safeguard.

“Honestly, hard to spot. Hard to spot. Because if they tell you, I wouldn’t take on these kinds of projects,” he said.

He said the amount of fresh capital raised should correspond with the company’s business and expansion plans.

“For us, we have to make sure that the amount of so-called new money coming into the company, it has to be commensurate with its business plan,” he said.

For ACE Market companies, Ting said there was no written rule prescribing the size of an offer for sale, although the authorities did not encourage large amounts.

The circumstances could differ for a larger company that was already cash-rich and had sufficient funds to finance its expansion.

“You just have to make sure that it is not a situation of the founders cashing out at the point of IPO. And then you left nothing for the company. These are the things that we look for,” he said.

Ting said principal advisers would intervene if they disagreed with a client’s proposed IPO structure and could seek guidance from the authorities where necessary.

“If they don’t listen, then we have to make sure they listen to us, basically. If they still don’t listen, then we have to basically consult with authorities. They have to seek their guidance as well,” he said.

He said IPO proceeds should generally be channelled towards the company’s core operations and growth, including expansion, product development, new factories, production lines, laboratories and research and development.

“Into its core business. Something to do with its core business,” he said.

On pre-IPO dividends, Ting said founders of small and medium enterprises might have spent years reinvesting earnings into their companies instead of paying themselves dividends.

He said there was nothing wrong with founders rewarding themselves before a listing, provided sufficient funds remained in the business to support its operations.

“It’s okay to basically pay a dividend and reward yourself. So long as you leave enough money in the company for the operations. So, we are okay with that,” he said.

For those interested to hear more about ‘The Real Price of Going Public feat @Aurum Story | Gary Ting’, the podcast is available at https://www.youtube.com/watch?v=DGRs1HzdkxA&t=913s