All entrepreneurs must dream of the day when their business grows to such an extent that it justifies a listing on a recognised stock exchange such as the JSE.
Let’s suggest that this company grows even more and that one of its departments or subsidiaries becomes so large that it justifies its own listing.
Now the big question: when is listing a company or one of its subsidiaries the right choice?
Naspers* announced recently that they will be listing their satellite TV division, MultiChoice, separately again.
My explicit use of the word “again” refers to the fact that MultiChoice’s predecessor, M-Net/Supersport, used to be listed until 2003 before it was completely consumed by Naspers.
Commenting on the listing, group chairman, Koos Bekker said that Naspers is “too large for the JSE”, while CEO, Bob van Dijk, described the listing of different divisions of Naspers as an opportunity to unlock value for shareholders which will not necessarily only be limited to the JSE.
Now, while I’m willing to accept the second motivation, I do find the first one somewhat strange.
This is simply because until the end of 2015, while SABMiller still formed part of the JSE, Naspers made up a whopping 13% of the JSE.
About 18 months later (SAB excluded), Naspers made up 19% of the JSE and over the same period, Tencent, which makes up the largest portion of Naspers, rallied from around 200 Hong Kong Dollars (HKD) to over HKD460.
During that time Naspers didn’t seem too big for the Index and they made no mention of unlocking value for investors.
Now, a further 18 months later, Naspers still makes up 18.6% of the JSE, while Tencent’s price has fallen back to around HKD319, and suddenly a new listing process is being initiated…
But I don’t want to speculate about how this may or may not be in the best interest of both existing and new shareholders.
What I would like to do, is to discuss the possible reasons for new listings, which will enable readers and investors to make an informed decision when considering these listings in light of the information provided to them.
It makes good business sense
Probably one of the most important reasons for listing an institution is to gain access to capital markets, to consistently increase the acquisition of additional capital, to conduct mergers and acquisitions, and to reward employees with equity-based incentives.
This message must be made very clear to investors, however, so they can be assured of the fact that the company has a clear vision and that it has implemented, or will implement (and how they plan to do it) the necessary measures to realise their stated goals.
Once a company (or company within a company) has reached critical mass and it has become relatively easy to determine its medium-term growth forecast separately, listing it may be considered.
It’s always safer not to aim too high with these growth forecasts, as you won’t want to disappoint the market upon the release of your first financial report.
According to Prof. Jay Ritter, based on data analyses on the American Stock Exchange (Amex), Nasdaq and New York Stock Exchange (NYSE), new listings are prevalent in market conditions where investors prefer purchasing shares.
Following the Dot Bomb era during which 380 new listings took place in 2000 alone, this figure dropped to 79, 66 and finally 63 between 2001 and 2003 as market pressure started to rise.
This figure then increased to an average of 162 per year up to 2008. During 2008 (and including the massive correction), only 21 listings took place.
This figure didn’t rise above 100 listings again until 2013.
It is no secret that top investment firms tend to list their companies when they feel they can earn more in terms of value on the open market and then repurchase those shares when they feel that these companies are completely undervalued.
Aside from critical mass, however, companies have to ensure that market conditions are favourable before listing.
Not all investors are experts, but very few of them are senseless fools.
What I mean by this, is that when a company is considering listing, they also have to ensure that their motives for doing so are pure, because investors will pick up on uncertainty and act accordingly if it’s not.
If the only motive for a company’s listing is a way out of a situation, then their motives are more than likely not so pure.
If, however, their motive to list is to acquire capital over the long term, chances are good that they will also gain the respect, support and loyalty of investors over the long term.
I want to conclude by warning investors that although there’s always great excitement surrounding any new listing, the results haven’t always been quite as great in the past for all of them.
On the contrary, it may have caused more grey hair than golden coins in terms of the number of companies who have listed vs. the number of those who managed to be successful.
Always do your homework properly when it comes to a new listing. Don’t just buy shares because you are excited about them, or because there’s a hype surrounding the relevant listing.
Schalk Louw is a portfolio manager at PSG Wealth.
*finweek is a publication of Media24, a subsidiary of Naspers.