IPOs
Abstract
Large and small business move to expand their business by increasing funds through issuing shares. The reason to go public is that it opens up many financial doors as it raises cash. Therefore, companies trade in an open market to attract maximum investors.It can be explained in a way that if a company issued its stocks to the general public for the first time, the capital structure of the company changes that is it mainly begin to rely on debt for finance. TESCO Plc is one of those companies which in the list of world’s largest retailers. It is a British multinational grocery and general store. It was founded in 1920, and Jack Cohen was the founder. With the passage of time TESCO diversified its range and it helped to increase its sales and reputation in the market. Public Limited Companiestake initiations to raise money for the new venture by reviewing the current market conditions. Investors are engaged with an organization to get a high return on their investment in the short and long run too.
IPOs
Introduction
Throughout the world, companies prefer to sale their stock to the general public. It helps them to grow their business. Therefore, an initial public offering IPO helps them to make a private company into a public company by sharing its stocks. The reason to go public is that it opens up many financial doors as it raises cash. Therefore, companies trade in an open market to attract maximum investors. Similarly, TESCO Plc was also from those largest companies which offered offering IPOs in the open market. With the initial growth, TESCO Plc also raised the prices of IPOs. However, with the passage of time TESCO is facing Long Term Underperformance of IPOs. The reason was that it was underperforming within the UK market which was a huge market. Therefore, it started selling its Dobbies garden which was profitable for TESCO. Considering this, the argument of this report is that whether the general public should invest in TESCO IPOs when Tesco’s shares are underperformed in the long run.
Literature Review
There is a vast literature available on Initial Public offerings as it is a stock market launch by different companies. In this, a company sells its shares to general public and investors. Aggarwal (2002) researched on stocks, shares, and IPOs, and he discovered that there are various advantages of IPOs. Although, there are also some disadvantages of IPOs, however, mostly it is beneficial for the companies as it increases the growth rate of business. It is the reason that companies sale its shares to seek a capital source for fund growth. Gregoriou (2011) also discovered financial benefits of the public sale of the stocks. IPOs play an important role in increasing trade between buyer and sellers in the open market.
According to Vakrman & Kristoufek (2015) in his research study, it can be said that there are some behavioral phenomena that are associated with IPOs. It involves, initial underpricing, long‐term underperformance, and “hot market issue”. Cook (2005) highlighted that the most important factor that is impacting the business of different companies is long-term underperformance of the company. The reason is that under-performing company shares are not preferred by the investors. It ultimately impacts the reputation of the company. Da Z, Engelberg J, Gao P (2011) conducted further research on those companies which are underperformance and ruined its business and its credibility. Therefore, Da Z, Engelberg J, Gao P. recommended in their research that companies should gain the attention of investors by showing their improved performance. There are different IPOs characteristics that can be used to attain the attention of investors as it helps them to grow their business (Da et al., 2011).
Impact of IPO
Banerjee (2016) states that there are numerous factors responsible for under-pricing of Graded Initial Public Offerings (IPO). The data was taken from the Indian companies that were publicized in 2007-2013 to determine what were the factors of underpricing. These factors include reputation of credit rating agency, retail and foreign investors, and board size. (Banerjee, 2016) Piotroski & Zhang (2014) explains that IPO’s are practiced widely in the country or market where the government needs to boost the economy by increasing investments. On the other hand, it is necessary for Stock Exchange Commission of the country to evaluate whether the firm offering it is underperformed in the long run. It was noticed in the case of Chinese Stock Exchange where government assessed the performance of those companies issuing their shares for the first time in the capital market (Piotroski & Zhang, 2014). Bell, et al. (2014) support the argument of Piotroski & Zhang (2014) by claiming that there is a relationship between an organization and financial institution that can be done by effective corporate governance policies. Investors would have an easy understanding of the valuation of a public company and its long-term stability to make decisions for investment. Also, it is a social and legal right of an investor to get complete analysis whether the company practicing IPO has potential to give a high return in the long run (Bell, et al., 2014).
Kaya (2013) argue on the statement of Piotroski & Zhang (2014) by claiming that companies issuing shares in favorable market conditions results in high leverage ratio in the long run that is within 3-5 years. It can be explained in a way that if a company issued its stocks to the general public for the first time, the capital structure of the company changes that is it mainly begin to rely on debt for finance (Kaya, 2013). Saurabh & Amrita (2012) argue on the findings of Kaya (2013) by claiming that Indian SEC took step on creating grading IPO for guiding retail investor, but retail investors did not consider it an important and the actions were proved to be ineffective on small decision makers (Saurabh & Amrita, 2012).
Company Overview and Scenario
TESCO Plc is one of those companies which in the list of world’s largest retailers. It is a British multinational grocery and general store. It was founded in 1920, and Jack Cohen was the founder. With the passage of time TESCO diversified its range and it helped to increase its sales and reputation in the market. Furthermore, TESCO hit various supermarket and hypermarkets and became involved in internet grocery retailing. The diversification and expansion in different countries played a great role in the success and growth of TESCO. It is noticed that Tesco focuses on generating cash via issuing new stocks to the general public. The practice of the company is to raise funds for new subsidiaries as well as providing more benefits to the existing shareholders. It has recently raised $600 million by issuing its stocks in the Asian market to expand the business and get involved in the area of real estate investment.
Discussion
The material extracted from literature review is related to the case of Tesco and the themes identified in the literature are presented in the form of subsections. The discussion on various themes can be observed in each subsection provided below.
Plan of Tesco Plc
The plan of the company was to raise huge fund for the investment in real estate business in the market of Asia as the growth was shown in this sector. For that purpose, Tesco decided to open new subsidiary and issue new shares to locals for generating cash. It is a well-known fact that companies are issuing IPO at high or low price result in undervaluing in the long run due to unfavorable market conditions (Kaya, 2013). Tesco was able to generate money in the short time due to its brand image in Asian market
Factors Allowed Tesco to Move On
The corporate governance policies and good relationship with financial institution allowed the company to generate cash and do business effectively in this market. The reputation of Tesco and the growth in the sector were the attracting elements for Tesco. Credit rating agency played an important role in influencing investors that Tesco Plc was offering shares underprice and that will prove to be beneficial for an investor in the long run (Bell, et al., 2014). The complete information was published including the trend of profitability of the company and growth of this sector in the Asian market so the investor may calculate the value of share issued by the company (Saurabh & Amrita, 2012).
Critical Facts
Tesco Plc had a good reputation and strong image in the global market at that time. It considered the expansion to facilitate shareholders of the company. The decision of expansion was based on the current growth shown in the real estate sector, but it depends on the economic environment in which a company operates (Saurabh & Amrita, 2012). Investors seek long-term growth of a company that was not considered important by Tesco. Tesco decision was not based on long-term growth, and the company did not recognize that it may not be able to provide high return when the economic and market conditions change in future. For example, if the sudden change came in the government policies and that may result in the changes in condition, the company would not be able to satisfy its investors (Kaya, 2013). Moreover, public limited companies use other options such as debt financing to generate cash for the period instead of issuing new shares. Tesco missed this fact and acquired new assets by raising funds through long-term loans. In short, the company underperformed in 3 years due to the change in the external environment and the share price undervalued more as that were at the time of IPO.
Summary and Conclusion
Reference List
Aggarwal, R., Krigman, L. & Womack, K., 2002. strategic ipo underpricing, information momentum, and lockup expiration selling. J Financial Economics, 66(1), pp.105-37.
Banerjee, S., 2016. Determinants of Under-pricing of Graded IPOs in the Indian Capital Market. Singapore Management Journal, 5(1), pp.45-58.
Bell, R.G., Filatotchev, I. & Aguilera, R.V., 2014. Corporate Governance and Investors' Perceptions of Foreign IPO Value: An Institutional Perspective. Academy of Management Journal, 57(1), pp.301-20.
Cook, D., Kieschnick, R. & Van, N.R., 2005. On the marketing of IPOs. J Financial Econ, 82(1), pp.35-61.
Da, Z., J, E. & P., G., 2011. On search of attention. J Finance Econ, 66(5), pp.1461-99.
Gregoriou, G.N., 2011. Initial Public Offerings (IPO): An International Perspective of IPOs. 1st ed. Burlington: Butterworth-Heinemann.
Kaya, H.D., 2013. The long-run impact of IPO market timing on capital structure. Investment Management and Financial Innovations, 10(1), pp.146-54.
Piotroski, J.D. & Zhang, T., 2014. Politicians and the IPO decision: The impact of impending political promotions on IPO activity in China. Journal of Financial Economics, 111(1), pp.111-36.
Saurabh, S. & Amrita, B., 2012. A Study of Impact of IPO Grading on Decision of Retail Investor to Subscribe in an IPO. International Journal of Mutidisciplinary Management Studies, 2(12), pp.152-57.
Vakrman, T. & Kristoufek, L., 2015. Underpricing, underperformance and overreaction in initial public offerings: Evidence from investor attention using online searches. NCBI, 4(84), pp.1-6.
