FINC6016 Financial Instruments and Markets

Assignment, Semester 2, 2016

In this assignment you are required to write a consultation report for a high net
worth client. He has employed your services to examine some upcoming Initial
Public Offerings (IPOs) on the Australian Securities Exchange. The client can see
that there are several Upcoming Floats and several Recent Floats on the site, and
is interested in learning more about investing in one. The client is interested in
finding out some more information about two IPOs, and is seeking an investment
recommendation from your group.
The client has around $1 million to invest, and is not seeking to invest in a
managed fund or listed trust (he is looking for a firm that does not invest in
other financial assets as its major function). The client would particularly like you
to compare two relatively similar IPOs (either in size, industry, or preferably
both). His preferred investment horizon is at least three years, although he would
also be interested to know if there is potential for a good short-term return (for
flipping purposes).
He is looking for a report that summarises key details from two of the IPOs in a
simplified manner, plus an indication of the overall performance of IPOs
generally, and some insight from recent research that might help him in his
future investment endeavours. At the end of the report, he wants to see a
recommendation for one of the two IPOs that you have examined in the report.

Required
Part 1.
For each of the two upcoming/recent floats, the following items are requested.
Some of the information may be available on the ASX website, but you will need
to visit the firms website or obtain a copy of the prospectus. Note: it may be that
the offer is closed/fully subscribed by the time you analyse the firm, but use this
as theoretical investment advice. If you use a recently completed IPO, please
act as though the first-day returns are unknown and use the information as if the
firm had not listed already.
a) Name of the firm and stock ticker (1 line)
b) The date that the stock is expected to be listed (or was listed) on the
exchange (1 line)
c) How much capital the firm is looking to raise and the issue price. Is there
any minimum/maximum that they will accept if the amount is uncertain?
(2 lines)
d) Is there an underwriter for the issue? If so, which firm is the underwriter?
(1 line)
e) What does the firm that is raising capital actually do? If it sells goods, what
goods does it sell? If it provides a service, what service does it provide? If
it is intending to search for resources/develop a new drug for example,
specify this. (1-2 paragraphs)
f) Who appear to be the key people that are running the firm? This might
include the CEO/CFO and other key personnel, e.g. board members if
notable (this will depend on the company)? What are their qualifications, if

g)

h)

i)

j)

k)
l)

any, and experience in running this or similar firms? Are we expecting

them to get paid a lot or retain a lot of the company post-flotation? (1-2
paragraphs per member, do not list more than 3.)
What does the firm intend to do with the capital it raises? For example, is
it going to use it for organic growth (e.g. investment in plant and
equipment) or for acquisitions? Are there any indications that it might use
the proceeds for adjustment to capital structure (e.g. paying off debt) or
working capital management (keep the business running?) Does this seem
like an appropriate use of funds given the operations of the business? (2-3
paragraphs)
What are the main risks of investing in this firm at the IPO (expect these to
be reported in the prospectus. If not reported in the prospectus, use your
judgement.) Would this IPO be considered relatively risky or safe to an
investor (compared to other IPOs)? Consider if the firm has been
successfully operating in the past, or is in a safe industry, or whether their
operations are quite speculative, and there is a lack of cash flow. (2-3
paragraphs).
How much of the firm (what proportion) is going to be held following the
IPO by the existing shareholders (or if more appropriate, how much of the
issue will be held by the new shareholders following the completion of the
issue)? This might be indicated under directors interests for some offers.
Which of the listing requirements tests does this appear to be following?
(1 -2 lines)
Has there been any publicity surrounding the IPO? This can include media
coverage (particularly in the financial press) or publicity organised by the
firm or its underwriter/lead manager. Does it appear that the issue has
been through a book-build phase, for example? Is there any chatter about
the IPO on internet message boards? Are there any interesting quotes
from users of these forums (e.g. Hot Copper) regarding the IPO? (1-2
paragraphs)
What is the number 1 reason that you think this IPO would be a good
investment? (1-2 paragraphs)
What is the primary reason that you would want to avoid this IPO as an
investment? (1-2 paragraphs)

Part 2.
Provide a discussion of around 500-700 words on the state the market for
IPOs (currently and in the last two years). This can be in dot-point form
covering some key points
In this section, you may like to include some of the following features. Put
particular focus on the issues that you think are most relevant to your chosen
IPOs:
In general, does it look like a good time for investors to participate in IPOs?
How has the IPO market performed (in terms of numbers and first-day
returns) recently compared with other time periods (e.g. looking at data from
Jay Ritters website) or sectors? Investment bankers might speak of windows
of opportunity for IPOs is this one of them (or is this a risk)? Are there
industry-specific factors that might affect one of the IPOs in your sector?

Does it appear that the market has been influenced by the end of the mining
boom and the depreciation of the Australian Dollar? Is there a shift in the
industries that are going public? Is this shift in perceptions/industries likely to
affect the firms chosen in Part 1?
Does it appear important to the success of the IPO to have private equity
funding? How have Private Equity backed IPOs performed relative to nonPrivate Equity backed IPOs?
Considering the firms that you have chosen for Part 1, are there some firms of
similar size/industry that have floated in recent times that you might consider
a good comparison for the firms chosen for the upcoming float? What was the
performance of these comparable firms like over the period since floating?
Is the linkage of Australia with other Asian countries affecting the taste for
IPOs? Does it appear that more firms from outside Australia are listing on the
ASX because of the benefits, such as the ability to raise capital?

Part 3.
The client wants you to provide him with a short summary (around 500-700
words) of some interesting recent academic articles on IPOs, perhaps to guide
him in future investment decision making. These dont need to be limited to
Australian evidence.
For example, he is aware of some issues relating to underpricing of IPOs, but is
also interested to know whether it appears that there is any evidence on the
longer-term performance of firms that have listed, such as at his three-to-five
year investment horizon.
Some points you might like to discuss (again, use your judgement to determine
which of these are most relevant points, there might be other academic studies
that are perhaps more related to your chosen firms):

What has been the historical performance of IPO firms over the medium to
long term horizon? Do they appear to be a good bet? Is there any way to
find IPOs that appear to be better performance in the longer-term what
risk factors appear to affect the post-listing performance of IPOs?
Are features of the Australian market more or less conducive to IPO
performance than other regional markets? For example, the legal system
or disclosure requirements may help?
Some firms acquire other firms after going public (sometimes called IPO
Acquirers). Is there a difference in the performance of these firms
compared to firms that do not acquire? Why might firms like to acquire
other firms following a successful IPO?
Does there appear to be a difference between Venture Capital or Private
Equity backed IPOs and non VC-backed IPOs in terms of their
performance?
Is there useful information in the use of proceeds disclosures in IPO
prospectuses?
Do political considerations appear to affect IPO activity? For example, do
political promotions or political connections appear to impact the number
of IPOs/success of IPOs? Or are there issues relating to state election
uncertainty and the likelihood of floating?

There is a lot of research on IPOs out there, please try to find things that are
interesting (and relevant to the companies that youve examined in this report.)

The end of document.

Finally, please make sure to include the recommended IPO out of the two
examined in part 1. (e.g. RECOMMENDED FIRM: QANTM). Please also provide
a 1-2 paragraph statement as to why this is the recommended firm (with
consideration to parts 2 and 3).

Notes:
PLEASE READ THE INSTRUCTIONS CAREFULLY!
The client wants what he wants. If you provide the client advice that is
inappropriate or unhelpful, he is going to be disappointed. Do not write the
report as though this is what the client should want. Do not ignore his
instructions.
Presentation is important. Try to make the structure of the report in Part 1 similar
for both firms. Where possible, it would be very helpful to include key details in a
summary table, or graphically, so the client can see at a glance some key
statistics (e.g. issue size, price, date). You could include some previous IPOs in
the table for the purpose of comparison.
Try to use sources from different areas for Part 2. Reports from Deloitte or AVCAL
might be a good place to start, but there should be other sources, including the
Recent Floats on the ASX website that will be helpful. The RBA website is a good
place to find summaries of the current economic outlook to extend the
information youve provided (e.g. for commodity prices, trade partner analysis).
Jay Ritters website https://site.warrington.ufl.edu/ritter/ipo-data/ contains an
amazing amount of data covering many issues relating to IPOs that will come in
handy.
In part 3, use recent references as much as possible. Cite articles from goodquality sources (e.g. Journal of Finance, Journal of Financial Economics, Journal of
Financial and Quantitative Analysis, Review of Financial Studies, Journal of
Corporate Finance, Financial Management, Accounting and Finance) or by wellknown authors (e.g. Ritter, Piotroski, Brau, Hovakimian, Gompers) where
possible. Use a Google Scholar search for a very simple way to find articles, and
then look by year and/or cited by to find influential and/or recent ones.
Refer to the article by using the authors surnames, followed by year in text, for
example:
Brav and Gompers (1997); Brau et al (2012)
with a reference at the end, such as in this style.
Brau, J.C., R.B. Couch, and N.K. Sutton (2012) The Desire to Acquire and IPO
Long-Run Underperformance, Journal of Financial and Quantitative Analysis, 47,
493-510.
Incorrect and insufficient quality citations are a common mistake.

The report should be no more than ten pages (in standard fonts excluding the
cover sheet, but including everything else!), allowing for some variation in length
that will occur due to different companies being analysed. Follow the structure
for each of the parts.
Do not write too much. (Edit the report before handing it in, and work on the
presentation).
Presentation matters. Is there a good way of presenting the information
that helps get the point across easily. Use Tables or Charts where
possible (make sure that these are legible and labelled).
Do not use any appendices. If it doesnt belong in the main report, it
doesnt belong in the report.
Use your judgement to determine what is appropriate for the report if it
is not clear from the instructions. Sometimes you might have to think
for yourself!
Some information may be more or less relevant depending on the firms
that youve chosen.
Think what the client would like to see, what he does not want to see.
How would you impress the client to ensure that he would hire you
again?

Finally.
You are able to do this assignment in teams of 1 5. Members can come from
any stream. Please ask for permission first if you would like to do the assignment
individually.
The final report is due on the 17th of October at 5pm. It is to be submitted
through Turnitin by one group member. Late assignments will be penalised 10%
of the total available mark per day.
Please include a cover sheet with all group members names, student ID
numbers, and stream. Every group member is responsible for the final submitted
assignment.
The final mark for the assignment will attach equal weights to the three parts,
plus extra marks for presentation + references and the overall flow of the
assignment if the parts are well-integrated. (e.g 5+5+5+5). Marks will be
deducted for disobeying specific instructions (e.g. selecting a managed fund as
one of the IPOs, incorrect referencing and including any appendix).