Oran Hall | New APO trend latest option for market investors
ADVISORY COLUMN: PERSONAL FINANCIAL ADVISER
An additional public offering, or APO, is an invitation by a company to its shareholders and other members of the public to buy shares in it, having previously done an initial public offering of shares that are listed and trade on the stock market.
The APO is different from a rights issue, the latter being an offer of new shares that companies make to their shareholders in proportion to the shares they already own.
These three offers of shares – the APO, IPO, and rights issue – are means of raising permanent capital, meaning that the company does not return the sums invested to the shareholders, who must sell them to interested investors if they desire to have the money they invest returned to them. Depending on how the market behaves, they may make a profit or a loss when they do sell their shares.
For the companies, these methods of raising funds are attractive as, unlike bonds, there is no requirement to pay back the principal invested. There are, however, expenses associated with APOs and IPOs, but they are paid from the proceeds of the issues.
The fact that the companies do not have contractual periodic payments to make, as is the case of interest on bonds, adds to the attractiveness of the share issues. Companies, however, pay dividends to their shareholders, if profitable, but they have discretion over whether they pay dividends, how much they pay, and when.
Companies are not constrained by limits on the number of shares they may issue in an APO as they may increase their authorised share capital, and the number of authorised shares, upon approval of such action being voted by the shareholders at a properly constituted meeting, if the difference between the authorised shares and the issued shares is less than the new shares to be offered in the APO.
The new shares may be issued at a discount to the market price and, as we have seen, at different prices to various groups. Among the factors considered in pricing the shares offered to investors in an APO are the current and recent prices of the shares of the company; the market conditions at the time of the issue; and the recent market prices of and demand for publicly traded shares of comparable companies.
The new shares are listed on the stock exchange, like the existing shares, if the stock exchange approves the application to list them. They also rank pari passu with the shares previously listed, meaning they carry equal rights.
As is done with IPOs, the company making the offer of new shares in the APO issues a prospectus so that prospective investors can do the required analysis by themselves or with the help of suitably qualified financial professionals in order to make an informed decision on whether to subscribe to the offer.
The new money raised, as in the case of an IPO and a rights issue, enables the company to expand, diversify its operations, and even reduce its debt. In addition to this, an APO makes it possible for the company to expand its shareholder base as the issue is not limited to existing shareholders.
There is a designated period within which investors must apply for new shares being offered in APOs and IPOs. In the case of a rights issue, only the shareholders on the register of the company on the record date are eligible for the rights and they are required to pay for the new shares during the period designated for payment to be made.
The rights a shareholder is eligible for is in direct proportion to the number of shares they own, for example, the offer may be based on the right to buy one additional share for every 10 shares owned.
Shareholders may subscribe for the full amount of their entitlement or just a portion, but they may also not subscribe and allow their right to lapse, or they may buy the rights of other shareholders, or sell theirs, for rights do have a value that can be priced.
Considering that APOs target both existing shareholders and non-shareholders of the issuing company, an APO may cause each shareholder’s relative share of the company to decline. This may also happen in the case of an IPO, as was evident in some local IPOs in which, in addition to the shares sold directly to new investors, some founding shareholders also sold some of their shares to new shareholders. In the case of a rights issue, only shareholders opting to sell their rights or let them lapse see a dilution in their ownership of the company.
It is interesting how warmly investors have responded to APOs in a market that has lost much of its strength, and I would not be surprised if more of the stronger companies use this means to raise capital.
Oran A. Hall, principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.