Inside an IPO: Gain Capital Going Public
by John Jagerson Gain Capital filed their S1-form with the SEC on Monday. The S1 is one of the initial filings required before an Initial Public Offering (IPO) can take place. This means that if everything goes as planned, Gain Capital will be a public stock. This process it going to be interesting to investors for at least three reasons.  1. The S1 contains internal (and confidential) information about a company's operating processes and financial performance. This is one of the first reliable views inside a major forex dealer that most traders will have ever had. 2. Forex dealers have very attractive operating margins compared to other financial services firms and the forex market is one of the fastest growing in the world. Being able to participate as a partial owner in a forex dealer may be interesting to stock traders and forex traders alike. 3. Successful IPOs are an indication of a strengthening market. If new issues are able to find enough buyers to get an attractive price it indicates that investor optimism is improving. 
To see the second article in this series - Click here. To see the third article in this series - Click here. Over the next few videos we will use the Gain Capital IPO as a case study to talk about some of the things we can learn about forex dealers and the IPO process. From the initial documentation we have already learned very interesting things about profitability, order execution, problems the firm has had in China and where they intend to spend the money they get from the IPO. However, before we dig into the specifics of the Gain Capital filing you need to understand how an IPO works and why companies do it. This article and video will give you the background you need to understand the process and why investors might be interested in the stock issued through an IPO. What is an IPO? If a private company needs capital for requirements that exceed its ability to self-finance through operating cash flow there are a few alternatives management and the firm's ownership can utilize to provide that capital. These may include debt, private investment or a public investment through an IPO. Each of these alternatives is evaluated based on current and projected needs for cash. In an IPO a company's owners sell a portion of the firm to public investors. This is usually done through an underwriting process that looks and acts a bit like a pyramid. The company negotiates a sale of its stock to one or more investment banks that act as an underwriter for the offering. The small number of underwriters in turn sell their stock to the much larger pool of investors in the public markets. Underwriters are compensated through fees and underpricing in the stock they are purchasing from the firm. An underwriter takes a risk that they will be able to sell the stock they bought from the firm (that was under-priced) for more than they paid. The underwriter provides value to the firm by making a large purchase and facilitating an orderly sale of their initial stock. In some cases, the underwriters may initiate analyst coverage for the firm following an initial quiet period after the IPO. Other institutional and retail investors can purchase the stock in the public market but it is not uncommon for an anticipated IPO to lead to a large and fast run-up in the stock's price. As the underwriters "flip" their stock into the market, selling pressure can push prices back down and a lot of volatility is common. There is some statistical evidence to suggest that investing in new IPO's can outperform a generic stock index. The assumptions behind that evidence may not be repeatable for a retail investor trying to build a diversified portfolio of recent IPOs. Historical performance and financial data is not as available for a stock issuing its IPO as it is for a company that has been publicly available for a long time. This increases the number of "unknowns" about the firm and can make these investments very risky. However there is some information available about the firm through the public filings made before the offering. It makes sense for a potential investor to look for the same kinds of fundamental factors that they would in an existing public firm. However, despite the risks, it is likely that IPOs will continue to attract investors because they are usually issued by companies in a transitional phase. Companies in transitions are exciting and interesting to investors. The prospects for a big win and the possibility of becoming another "IPO-millionaire" can be very enticing. Understand the risks before you take a chance. Note: This is a summary of the IPO process. As you can imagine, the actual procedures are much more complicated. You should also know that although the process outlined in the article is the most common method for an IPO there are other formats. An auction format or hybrid auction is rare but also sometimes used to try to make the process a little more equitable.
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3.25 Copyright (C) 2007 Alain Georgette / Copyright (C) 2006 Frantisek Hliva. All rights reserved." |
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