Initial Public Offer for RXP Services Ltd & Baru Resources Limited - Case Study Example

Initial Public offer (IPO): RXP Services Ltd & Baru Resources Limited Student’s Name: Institution Affiliation: University: Activities of the businesses RXP Services Ltd RXP is an ICT management delivery and consulting service company. It offers a wide range of services that includes application development, ICT support and maintenance service, delivery and integration services, management and technology consulting services. It acquired Vanguard and Indigo pacific. Baru Resources Limited Baru Resources focuses on identifying and developing export thermal coal projects and nard coking coal. The project area of the company is identified as The West Galilee Project within Eromanga Basin, close to 200kms of Hunheenden, and around 375kms of Queensland’s Mount Issa. Legal Ownership at the Issue of Prospectus RXP Services Ltd RXP services Ltd was a private Limited company at the time of the issue of prospectus. The original owners of RXP services Ltd considered that a public company is now a more appropriate structure because it will be entitled to a wide source of funds. The IPO will give members of the public a chance to buy shares in order for the company to raise more capital. If it remains a private company it will not be allowed to offer its shares for purchase by the public. Public corporations get good feed back when they offer their shares for listing. The company can attract international investors (Inderpal & Mitchell, 2007). Baru Resources Limited Buru Resources Limited was a privately owned company at the time it issued its prospectus to the public. The original owners of Baru Resources Limited a public company is more appropriate structure because it is able to access a large amount of capital through issue shares to the public. A public Limited company has a wide range of capital source, and for the company to expand its operations, it had to offer its shares to the public by issuing a prospectus. Public legal ownership provides optimal results for listing. It encourages more participation by the general public and international investors. Reason for Underwriting of issue RXP Services Ltd RXP Initial Public Offer was underwritten. Despite the company being a large ICT service provider, there is a high likelihood that it has not been known on the Australia Stock Exchange market. Owing to this, the chances that all shares would have been purchased is minimal. Underwriting through underwriters, offers assurance of raising the capital required by the company. Any shares that are not bought by investors will be purchased by underwriters. The underwriting company was E.L & C. Ballieu Stockbroking Ltd. Baru Resources Limited Baru Resource Limited Initial Public Offer was also underwritten. Underwriting of the issue provides security as far the certainty of getting the needed capital is concerned. Baru Resource Limited may not be popular to the degree of having investors rush to buy all of its shares offered at the IPO. To make sure that adequate funds are attained, underwriters offer the assurance of purchasing any remainder of shares that has not been taken by investors. Signaling mechanisms in the prospectus RXP Services Ltd The companies used various mechanisms to signal investors to purchase the shares. The company, in its prospectus offered a larger retention of ownership by insiders. This means, if one bought the company shares, he was entitled to have ownership rights of the company. Under-pricing was also used. The price per share was $ 0.50. Habib and Ljungqvist (2001) argue that under-pricing encourages more people to participate in the IPO. The company was described as having a strong and experienced leadership with focused financial calendar. A reputable E.L & C. Ballieu Stockbroking Ltd was used as an underwriter. Using a reputable investment firm as an underwriter is a form of a signaling mechanism. The auditors were Pitcher Partners. Appointment of highly qualified auditors is a strong point for the company. Baru Resources Limited Baru Resources Limited used underwriting as one of its signaling mechanisms. The price per share offered at the Initial Public Offer was 20 cents per share. Under-pricing enables many investors to buy more shares and hence stand a chance of gaining when the shares do well on the Australian Stock Exchange market. The promise of insider selling was to make the investors to feel freer when buying the shares of the company. According to Inderpal and Mitchell (2007), disclosure of expected earnings encourages investors to rush to buy the shares. Despite describing the speculative and risk venture into the exploration and mining business, the company also promised subsequent equity offering. The share owners become among the owners of the company. This is to lure more people to participate in the IPO. Disclosing of the companies financial position of the company prior to the IPO date provides more information to potential investors. If the company got excess capital, the retained shares were to be converted to working capital (Willenborg, 1999). Issuers’ extent of small business, and small business definition RXP Services Ltd RXP Service Limited does not meet the definition of a small business prior to listing. On the run up to listing RXP Services Limited was a large corporation engaging in the provision of ICT services to a range of firms. The company acquired the vanguard Acquisition and Indigo Pacific to expand its operations. At this juncture, RXP Services Limited can hardly be referred to as small business. From the onset the company engages in wide range of services, which it provides to many companies that need the services (rxpservices.com, 2011) Baru Resources Limited Baru Resources Limited likewise does not meet the definition of a small business prior to its listing. Baru Resource focuses on the identification and development of export thermal coal projects and export hard coking coal. Baru Resources holds an interest in seven tenures of exploration. A company that deals in search ventures cannot be described as a small company. Large amount of funds are required for exploration of the minerals that the company deals with. A company that sought to raise $ 2,110,000 is not a small business. Moreover, the company has a board of directors, demonstrating that, it is not a small business (baru.com, 2011) Small business definition A small business is a business that employees less than twenty people. It has an independent ownership and operations. The owners have close control, and the amount of capital involved is also small (Willenborg, 1999). References Baru Resources Limited > http://www.baru.com.au/companyoverview.php Habib, M. A. & Ljungqvist, A. P. (2001). Underpricing and entrepreneurial wealth losses in IPOs:Theory and evidence. The Review of Financial Studies, 14 (2), 433–45. Inderpal, S. J. W. & Mitchell, V. Z. (2007). Does intellectual capital disclosure reduce an IPO's cost of capital?: The case of under-pricing. Journal of Intellectual Capital, 8 (3),.494 – 516. RXP Services Website > http://www.rxpservices.com.au/ Willenborg, M. (1999). Empirical analysis of the economic demand for auditing in the initial publicofferings market. Journal of Accounting Research, 37 (1), 225–238. Read More