Business Finance

Krakatau Steel expects to raise between Rp 2. 52 trillion and Rp 3. 63 trillion (US$406. 5 million) from an initial public offering (IPO). Krakatau Steel would sell 3. 15 billion new shares or about 20 % of the company’s enlarged stocks at a price range of between Rp 800(80 US cents) and Rp 1,150 a piece during the IPO. Danareksa Sekuritas , Mandiri Sekuritas and Bahana have been named co-underwriters of the IPO. The price-to-earnings (PE) ratio would be between 9. 5 to 14 times in 2011 projected net income and and the industry’s average PE ratio is 10. 2 times. State-owned Enterprises Minister is upbeat that the company’s IPO is increasing and optimistic because the market is at its peak. Krakatau will use 36% of the IPO to upgrade production capacity and 24% of the listing will be used to build new factory in cooperation with South Korea’s Pohang iron & steel b. Analysis From this article, we can observe that Krakatau Steel is expecting to raise its capital from Rp 2. 52 trillion to Rp 3. 3 trillion(US$406. 5 million) from IPO. IPO (Initial Public Offering) refers to an offering made by firm to raise funds from the public by selling shares , the firm usually hires an investment banker who will arrange for the shares to be sold to the public. Definitely the firm will have many shareholders and investors running the business. Krakatau Steel needs to raise its capital as to increase productivity and upgrade the company’s hot strip mill to 3. 5 million tons per year by 2013 from the current 2. 4 million tons.

With more capitals, the firm will be able to expand its production to gain more profits. Krakatau Steel could not directly sell its shares to public therefore the company will need an investment banker to sell its shares. Investment banking is a financial institution that assists corporations and governments to raise capital by underwriting and acting as the agent in the issuance of securities. In this case, Danareksa Sekuritas, Mandiri Sekuritas and Bahana have been named co-underwriters of the Krakatau Steel’s IPO.

With the assist of these 3 co-underwriters, Krakatau Steel will be able to sell its shares such as stocks and bonds to investors. It is believed that Krakatau Steel will sell 3,15 billion new shares or about 20 percent of the company’s enlarged stocks at a price of between Rp 800(80US cents) and Rp 1,150 a piece during the IPO. Official of Mandiri Sekuritas explained the comparison price-to-earnings (PE) ratio of Krakatau Steel and industry’s average. The company‘s PE is way higher than average.

This will proves the existing shareholders will have secure shares in the company as the company is progressing well. In addition, the statement from State-Owned Enterprises Minister Mustafa Abubakar regarding the set price, he is content that the company’s IPO would be oversubscribed three to five times. This tells us that the company is doing excellent in making profits and consistent in their productivity. Furthermore, the company’s executives will travel to Singapore, Hong Kong and The UK to meet potential investors.

The raising of capital is a good sign for new shareholders to invest their money in the company; new shareholders will look into the possibility in making quick profits as the company’s IPO are above the average with an attractive margin. There are plenty of risks of IPO, the regulatory risk; the requirement to comply with stock exchange rules increases the duties of directors and officers of the company. It is difficult to foresee the future of a company, definitely the company might not always in a good condition hence the price of IPO might face a downfall.

National security might be one of the factors affecting the price of IP . Shareholders related risks, alleged errors, omissions, misstatements in the listing offer document. These errors could possibly lead shareholders to lose their money as they have to spend money to correct and justify the documents. The increase in shareholders following an IPO magnifies the potential for a lawsuit/accusation of shares. IPO is one of the accesses to capital to fund growth of a company. IPO becomes one of the most realistic and convenient ways to secure the continuing growth of the business.

Public placement of shares on a stock exchange allows the company to attract capital to fund both organic growth such as modernization and upgrade of production facilities (upgrade the company’s hot strip mill capacity), implementation of capital-intensive projects and acquisitive expansion (develop a 388-hectare land in West Java for the location of a new factory in cooperation with South Korea’s Pohang iron & steel). IPO may lead to the increase in market shares for the company.

Since the company’s shares have been placed in the stock exchange, the company’s profile will receive wide media coverage that can increase the company’s existence and recognition of its products and services. Thus allowing potential investors to look upon the company to invest their wealth. A Financial Manager must be able to identify which is the best and possible investment banker to hire. Financial managers should not only do paper works but they have to get involved to the field where they can deal with situation like dealing with brokers and investors.

They have to be aware of current stock/share market, this is vital for them in making decision in which they should sell or buy shares. Not only that, they have to be smart in finding ways of obtaining funds to raise capitals, for example through equity or debt. For instance, if the company decides to take bank loan, what is the possible outcome or risks that might affect the production of a company? Using equity, such as IPO, financial manager acting an important role in analyzing the stocks and shares.