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.
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.