Grow Your Business

You can go to a bank if you need capital. But if you are wary of high interest rates and fear defaulting, you can offer your shares to the public through an initial public offering—the first-time sale of your company’s securities to public investors.

Going public will dilute your ownership of the business, but the tradeoff is that your company will gain value, and its shares can be used as a currency to grow itself and acquire other firms. Makati Finance Corp. (MFC)  took the IPO route in 2002. It decided to become “a small fish in a relatively larger pond” after restructuring and reorganizing itself, wiping out its accumulated deficits, and turning lean and mean to avert collapse during the economic crises of the 1980s and 90s. It is now on a solid footing thanks to the efforts of its chief executive, Rene Benitez.

When Benitez took over MFC in 1996, the 30-year-old firm was riding on the crest of the Philippines’ economic recovery. The company, founded in 1966 by his mother, Teresita Boncan-Benitez, had focused on providing real estate, appliance and fleet car financing to clients. It scaled down operations in the 1980s due to difficult economic conditions, but emerged with a stable balance sheet by concentrating on collecting its receivables.

Boom and bust
With the resurgence of economic activity in the 1990s, MFC introduced new products and services, stepped up consumer lending, and formed subsidiaries for its planned forays into investment banking, securities dealership, insurance brokerage, lending investor and pawnshop operations. It even acquired an Iloilo-based financing firm to serve as its expansion arm in the Visayas. “Our goal then was to grow into a multi-product line, but it turned out to be ill-timed since the tiger cub bubble was about to burst,” says Benitez. 

The 1997 financial crisis wrought havoc on the company. Many borrowers defaulted on their loans, so to rationalize MFC’s operations, Benitez shelved the insurance brokerage and pawnshop businesses, sold the investment holding company, and closed the lending investor and Visayan subsidiaries. He transferred MFC’s corporate finance unit to Amalgamated Investment Bancorporation or AIB, an affiliate that obtained an investment banking license in 1998 and subsequently bought MFC’s securities dealership subsidiary.

Singaporean connection
Benitez then invited the group of his former boss, a Singaporean who had just retired from DBS Securities, to invest in MFC and AIB. Both companies ended up partly owning each other through cross holdings. The Singaporean group eventually acquired 50 percent of AIB and 33 percent of MFC.  “To grow your business, it is better to approach former employers or business associates rather than family members, because expectations are more professional especially when it comes to raising capital,” says Benitez.

With a foreign institutional shareholder in place, MFC was reorganized in 2000. Benitez became co-managing director with Maximo Borromeo, who handled day-to-day operations. The new team decided to drop MFC’s less profitable lines, retaining only two loan products: consumer loans to medical professionals and factoring of receivables. As a result, the company turned around in 2001.

Launching an IPO
To wipe out its accumulated deficits, MFC restructured its balance sheet by reducing its capital to create a reduction surplus, increasing its authorized capital, and issuing new shares at a premium, resulting in additional paid-in capital. Finally, MFC applied the reduction surplus and additional paid-in capital against its accumulated deficit. 

MFC was ripe for an initial public offering by 2002. “Do we want to remain a big fish in a small pond by being majority owners of MFC, or do we want to become a small fish in a relatively larger pond by going public?” Benitez asked himself. An investment banker, Benitez knew that “when you take on other people’s money, you suffer a dilution in ownership.” But the advantage of being publicly listed is that the company gains value, and its shares can be used as a currency to grow the firm and acquire other companies. Hence it was an easy decision to launch an IPO of 19,560,000 common shares at an offer price of P1.38 a share.

Fresh funds, new owners
The fully subscribed offering led to the January 2003 listing of MFC in the Small and Medium Enterprises Board of the Philippine Stock Exchange. After raising P27 million from the listing exercise, the company repaid a portion of its debts to AIB and obtained fresh funds to finance its lending activities, particularly Rx Cashline, an all-purpose loan for medical professionals, and MFC Factors, a credit facility for small and medium enterprises.

Doctors, dentists and vets
Following its decision to concentrate on Rx Cashline, MFC’s main market now comprises medical doctors, dentists and veterinarians practicing within Metro Manila.  “We chose this niche because it is a market we understand very well,” says Benitez.

A personal consumption loan, MFC’s Rx Cashline is popular among medical professionals because of its short processing time, convenient payment arrangements, flexible terms, and competitive interest rates. The company’s MFC Factors buys the receivables of small and medium enterprises, but factors only receivables due from the Philippines’ top 1,000 corporations. Factoring is the business of buying debts at a discount so as to make a profit from collecting them.

Culture of governance
From the start, MFC’s board meetings were “very corporate, serious and formal affairs,” says Benitez.  He had been exposed to the company at a very young age, but left the country in 1980 to pursue degrees in business economics and organizational studies at Claremont Colleges in California.

He returned to Manila in 1983 to work as a researcher for the government-owned National Economic and Development Authority, and then returned to the US to obtain a master’s degree in economics from Yale University in Connecticut. He worked for the World Bank after graduation before signing up as a stockbroker, with Prudential Bache Securities and Shearson Lehman, from 1985 to 1989. He then joined a Hong Kong-based investment banking firm before moving to DBS Securities’ Philippine branch, where he became country manager in 1995.

The culture of corporate governance was still intact when he rejoined MFC in 1996. Under this regime, “the CEO respects the authority of the board, which is a collegial body that’s smarter than me and therefore gives sound advice,” says Benitez. The good-governance culture has helped in preparing MFC to become big, especially now that the SEC requires the election of independent directors in every company.

The next task
Now that MFC has gone public, Benitez’s next task is to look at allied industries that can provide capacity for deposit taking. He is particularly interested in rural and thrift banks under receivership, and in closed leasing companies.

Is there life after an IPO? “Only if you openly accept corporate governance as the method to grow your company,” says Benitez, who has underwritten the initial public offerings of Pancake House, Macondray Plastics, DFNN and his very own Makati Finance Corp.

Two ways of raising money

Edwin Villanueva, chairman of Ventures Finance Link, a finance consulting firm, discusses below the differences between private placements and initial public offerings as ways of raising capital.

Private placement. A private placement refers to the issue of securities to a limited number of people. In the Philippines, the rule of 19 defines whether an issue is public or private; that is, a placement to 19 or more people or entities makes the issuance public.

A public offering attracts more regulatory scrutiny, such as registration with the Securities and Exchange Commission. However, the Revised Securities Act, now the Securities Regulation Code, in some instances requires the registration of securities for private placements.
 
 

Initial public offering. An IPO refers to the first offering of a company’s shares to the general public. It is called initial because the company’s listing in the stock exchange normally follows its IPO.
 
 

Qualified investors. A private placement is usually offered only to “qualified investors.” A qualified investor is one regarded as more sophisticated than others, and thus able to judge for himself what the risks are in a prospective investment. As a result, a placement with a qualified investor is normally exempt from registration with the Securities and Exchange Commission, the government agency set up to regulate transactions in securities and protect investors against malpractice. The SEC comes into the picture during a public offering to ensure small investors are protected through proper disclosures from the offering company.

Public listing. An IPO assumes eventual listing in the stock exchange. There are costs involved in listing including the IPO tax and underwriter and other fees. A company listing in the stock exchange is also subject to disclosure requirements and other SEC rules, which, again, aim to protect the investing public against fraud and malpractice.
 
 

IPO advantages. Theoretically, a company offering its shares to the public gains access to more and cheaper funds. It also gives investors the opportunity to sell their shares in an organized market. However, this is a myth in our illiquid markets today, since the stock market is practically dead because few people are investing in stocks. (A stock, bond or commodity that is illiquid is not traded actively, and would be difficult to sell at once without taking a large loss.)

Listing also exempts the shareholder from the capital gains tax, though he must still pay the stock transaction tax of one-half of 1 percent.

IPO 101

Family-owned companies in the Philippines tend to remain closed to the public for various reasons, says Jose Cervantes, senior vice president of the Philippine Stock Exchange. And the public has not been using the exchange as a vehicle for raising cheaper capital compared with borrowed funds. As a result, the exchange is embarking on an educational campaign to make Filipinos appreciate the role of the stock market in the national economy. It intends to make them understand that the stock exchange is not a casino or a pyramiding scheme, a form of fraud based on a scheme that builds on non-existent values, often in geometric progression.

Pamela Quizon, head of the exchange’s legal advisory department, says the public may now make decisions based on verifiable information when buying or selling stocks as a result of the exchange’s full-disclosure requirements. Those requirements include reporting anything that happens within the company that may affect shareholder interest—particularly the minorities.

To attract more initial public offerings, the stock exchange has formulated less stringent rules and added an SME (small and medium enterprises) Board for the listing of companies capitalized between P20 million and P100 million. An initial public offering is a corporation’s first sale or offering of stock to the public. IPOs are almost invariably an opportunity for the existing investors and participating venture capitalists to make big profits, since for the first time their shares will be given a market value reflecting expectations for the company’s future growth.

“When the economic and political climate improves, we will see a resurgence of listings just like in the mid-1990s,” says Ma. Isabel Garcia, head of the stock exchange’s listings department.